TRADE WAR?
‘No one familiar with the Smoot-Hawley tariff of 1930 should relish the
prospect of a trade war with China -- but that seems to be where we're
headed and probably should be where we are headed.’ Robert J. Samuelson,
Washington Post, 27 September
Be prepared for media hysterics later this week, when the US House of
Representatives is likely to pass the Ryan-Murphy bill attacking China’s exchange
rate. There will be screaming headlines - - in both the US and China - - and lots of
huffing and puffing on CNBC, but the political and economic reality will be very
different. If any equities are hit by the predictions of trade war, that would be a
buying opportunity.
Here are five reasons why the Ryan-Murphy bill won’t start a trade war or lead to a
rupture in US-China relations:
1. The language in the bill was weakened significantly last week. The original
text required the US Commerce Department to find that currency
undervaluation is an export subsidy in all anti-dumping cases filed by
American firms, which would result in extra duties on imports from
China. The current version of the bill, however, simply requires Commerce
to consider, on a case-by-case basis, if the exchange rate constitutes an
export subsidy. In the past, both the Obama and Bush administrations
consistently rejected the argument that an undervalued currency represents
an export subsidy under the WTO rules. If this bill becomes law, its impact
on trade is far from clear.
2. The House is likely to pass Ryan-Murphy this week, but the Senate has a full
calendar and is unlikely to act on it before departing (probably at the end of
the week) to campaign full-time ahead of November’s mid-term
elections. Thus, the bill probably won’t become law soon.
3. If the Senate returns after the elections to pass Ryan-Murphy, China will
complain loudly but will respond in a measured manner, filing its own
anti-dumping cases against some US companies. And the WTO is almost
certain to reject Ryan-Murphy as contrary to the global trade rules that both
the US and China have agreed to abide by, which would require Washington
to drop or re-write the law.
4. Beijing understands that the legislative attack on its exchange rate was
launched by Congress, not by the White House.
5. Senior officials at the White House, US Treasury and the Chinese Communist
Party recognize the importance of the bilateral economic and strategic
relationship and will not over-react. Washington still need’s Beijing’s
cooperation on Iran and North Korea. China is America’s third largest export
market and was the fastest growing market between 2000 and 2009 (US
exports to China rose 330%, while its exports to the rest of the world rose
29%).
And while Beijing loves to pick a fight with Tokyo (before making up and
avoiding a trade war), China seems to go out of its way to avoid open conflict
with the US. Premier Wen explained his pragmatic view last week, after a
two-hour meeting with Obama dominated by discussion about the exchange
rate: ‘Our common interests far outweigh our differences. In spite of the
disagreements of one kind or another between our two countries, I believe
these differences can be well resolved through dialogue and cooperation. So
the China-U.S. relationship will always forge ahead. I have confidence in
this.’
Andy Rothman
CLSA Sept 2010