China has warned that the US could plunge the global economy into a 1930s-like depression if it passes a bill that aims to punish Beijing for holding down the value of its currency.
With the Senate set to vote on Tuesday on legislation that would impose tariffs on imports from countries that manipulate their exchange rates, China has said that the consequences of such a move could be dire, leading to a trade war.
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In a commentary just hours ahead of the vote, the official Xinhua news agency took the warnings a step further, saying the proposed legislation in the US was reminiscent of the Smoot-Hawley tariffs in 1930 that worsened the Great Depression.
“Comparing the current political and social situation with that of 80 years ago, we can find stark similarities: an economic downturn, a high unemployment rate, marked popular discontent, and growing political conflicts, especially when presidential politics is getting hot,” it said.
“Lawmakers focus mostly on the economic interests of their own electoral districts but fail to consider major political and economic issues from an international perspective.”
The US bill, scheduled to come up for a vote on Tuesday evening, will seek to put pressure on countries that the US determines are deliberately misaligning their currencies. The law would require estimates of such undervaluation to be included in so-called “countervailing duty” tariffs that Washington imposes on imports it deems to be unfairly state-subsidised.
Once through the Senate, the US legislation in its current form is unlikely to pass the House of Representatives and become law in the near future, since the Republican House leadership dislikes the bill. But trade experts think there is a good chance that some version of the legislation will eventually be passed, perhaps early next year.
The White House has questioned whether the bill would survive legal challenge in the World Trade Organisation – an issue on which trade lawyers are divided.
Some Republicans have shifted towards embracing such legislation as concern with the Chinese currency issue has risen. Rob Portman, senator for Ohio and former US trade representative under President George W. Bush, has backed the legislation despite being a member of an administration that staunchly opposed currency tariffs.
Jeff Sessions, a senator for Alabama who has a strong record of supporting trade deals and opposing protectionism, also swung his weight behind the bill and helped defeat an attempt by some Senate Republicans to prevent the legislation coming to a vote.
At the same time as waging a fierce rhetorical campaign against the US legislation, China has made some mild conciliatory gestures in its management of the renminbi.
On Monday, it engineered the biggest one-day appreciation of the currency in six years, letting it rise 0.6 per cent. But on Tuesday the renminbi pared those gains, dropping 0.4 per cent in afternoon trading.
Beijing keeps a tight leash on the renminbi, usually letting it rise in steady but tiny increments. Despite a recent increase in two-way volatility as global economic turmoil has deepened, many analysts believe that the currency will stay on a path of gradual appreciation.
“Looked at over the course of the year, the renminbi still seems to be tracking a 5 per cent annualised rate of appreciation,” said Mark Williams and Qinwei Wang, analysts with Capital Economics, in a note.
The renminbi has gained 30 per cent against the dollar since the peg was broken in 2005, but critics in the US believe that it still remains undervalued by as much as 40 per cent.
Anger in the US stems in part from its lopsided trade relationship with China. The US 2011 trade deficit was $428bn at the end of July, 37 per cent of which was with China.
However, China notes that its overall trade surplus has fallen more than 50 per cent since 2008 and has called on the US to look to itself for ways to boost competitiveness.
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