The growing danger of trade war

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The growing danger of trade war
31 March 2010

Demands for trade war measures against China are mounting in
Washington as the April 15 deadline approaches for the US Treasury
Department to submit its semi-annual report to Congress on currency
matters. The key issue is whether to declare China a “currency
manipulator” and thus open the way for retaliatory US penalties.

At a US House Ways and Means Committee hearing last week, economist
Fred Bergsten claimed that the Chinese yuan was undervalued by 40
percent against the US dollar, causing large job losses in the US and
a burgeoning trade deficit. He called on the Obama administration to
brand China a currency manipulator as the first step toward enlisting
the support of other powers to strong-arm Beijing, via the
International Monetary Fund and the World Trade Organisation, into
revaluing its currency.

Bergsten’s heated language is itself a symptom of rising trade war
tensions. Just as countries invariably go to war in the name of
“peace,” so Bergsten justified US trade penalties US against China as
“anti-protectionist”—a response to China’s “blatant form of
protectionism” in undervaluing the yuan. Bergsten’s “multilateral”
approach, appealing for European support in particular, seeks to
ensure “maximum impact” and minimise Beijing’s ability to retaliate
against Washington.

Europe, however, is mired in its own currency crisis. Conflict between
European governments over an aid package to heavily indebted Greece
have exposed fissures and called into question the future of the
unified currency. The resulting fall in the value of the euro has
assisted exporters, making European backing for any US push against
China less likely. EU trade commissioner Karel De Gucht told the
Financial Times: “At this moment, it is less of a political issue in
Europe.”

A US call for measures against China would place countries such as
Japan and Australia in an invidious position. Many Asian-Pacific
countries with longstanding strategic ties to the US depend heavily on
exports to China to keep their economies afloat. Joining Washington in
demanding the revaluation of the yuan risks economic retaliation by
Beijing. Not doing so risks a breach with the US.

Nevertheless, the protectionist clamour in Washington continues
unabated. Facing unemployment levels approaching 10 percent, Democrats
and the trade unions are eager to find a scapegoat to deflect
attention from their own responsibility for decades of systematic job
destruction. Last week, the union-backed Economic Policy Institute
released a report claiming that 2.4 million US jobs had been lost to
China since 2001. Its author Robert Scott called on Congress to impose
an across-the board tariffs of at least 25 percent on Chinese goods if
Beijing fails to alter its currency policy.

China yielded to US threats in 2005 and allowed the yuan to float
against the dollar, but re-pegged its currency in 2008 when the global
financial crisis erupted. Confronting its own economic and social
problems, Beijing has repeatedly declared that it will not revalue the
yuan. Visiting Washington last week, China’s vice commerce minister
Zhong Shan said it was wrong for the US to conclude that China was a
currency manipulator because of its trade surplus and warned: “The
Chinese government will not succumb to foreign pressure.”

Chinese exports were hit hard by the global breakdown, resulting in
the loss of at least 20 million jobs and sharpening social tensions.
Any revaluation of the yuan is likely to trigger a new wave of
bankruptcies and job losses in China. In an article in the Sydney
Morning Herald, Beijing University professor Fan Gang lashed out at
the latest round of “China-bashing” in Washington, pointing out that a
revalued yuan would only lead to higher prices and interest rates in
the US. Nor would more jobs be created in the US; rather production
would shift to countries with cheaper labour like India and Vietnam.

Currency exchange rates are part of broader tensions between the US
and China. Since the beginning of the year, the Obama administration
has taken a markedly more aggressive stance, signalled by a new US
arms sale to Taiwan and Obama’s meeting last month with the Dalai
Lama. US tariffs have already been imposed on Chinese tyres and steel
pipes. Washington is pressuring Beijing to support tough new UN
sanctions against Iran—a major energy supplier to China—and
criticising China over Internet censorship, with US conglomerate
Google winding back its Chinese operations.

Some commentators now claim that China is becoming more assertive.
Writing in the Financial Times last weekend, Eurasia Group analyst Ian
Bremmer warned that as a result of the economic interlinking of China
and the US, “a new conflict is unfolding that could be more dangerous
even than the Cold War.” He declared that Chinese “ambitions to extend
its influence in Asia and its plan to do business in far-flung places
have given new momentum to its military plans… A broader shift in the
balance of power is also likely to empower Chinese hawks to call for
greater resistance to US pressure in places such as North Korea, Burma
and Sudan.”

However, Morgan Stanley Asia director Stephen Roach, commenting on the
Financial Times on Monday, declared that China was not responsible for
America’s economic problems. He warned: “Washington’s scapegoating of
China could take the world to the brink of a very slippery slope. It
would not be the first time that political denial was premised on bad
economics. But the consequences of such a blunder—trade frictions and
protectionism—would make the crisis of 2008-09 look like child’s play.”

The worsening global economic crisis has only underscored America’s
waning dominance and China’s economic rise. Beijing’s search for raw
materials and markets is bringing it into conflict with the older
established powers. The parallels with the 1930s and the rising danger
of war are unmistakable.

Testifying to the House Ways and Means Committee last week, historian
Niall Ferguson supported the declaration of China as a “currency
manipulator” but cautioned against drastic unilateral retaliation.
“One of the important lessons of the Great Depression was that
protectionist measures, including competitive devaluations, tended to
worsen the situation of the global economy in the early 1930s. A
second historical lesson is that conflicts over currencies and trade
are often the prelude to conflicts of another sort,” he warned.

This slide toward trade and currency wars, militarism, neo-colonial
wars and broader global conflagration is the inevitable product of the
fundamental, irresolvable contradiction of the outmoded capitalist
system—that between global economy and the division of the world into
nation states. The only alternative is the socialist reorganisation of
the world by the international working class so that its vast
resources can be mobilised to meet the pressing social needs of
humanity, rather than the private profits of a wealthy few.

Peter Symonds

http://wsws.org/articles/2010/mar2010/pers-m31.shtml

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