And the drama continues! Yesterday, the U.S. House of Representatives passed a bill that will allow the U.S. to charge tariffs on countries that undervalue their currencies. Hold on a second! Countries that undervalue their currencies? Ring any bells? But of course! After months of screaming foul over China’s undervaluing of the yuan, lawmakers had finally had enough and voted 348-79 in favor of the tariffs.
Clearly, lawmakers mean business and aren’t taking China’s trade practices lightly. It’s a risky maneuver to send such a strong message to China since it isn’t one to take such threatening actions lying down. But it’s a gamble the U.S. is willing to take in order to protect its ailing economy.
At the same time, it could also be said that the U.S. is treading carefully around the whole issue and not being overly aggressive. Notice the cautious choice of words it used: The new bill only allows and not requires the tariffs.
To their credit, Chinese officials have (almost comically if you ask me!) “given in” to U.S. demands for more yuan flexibility. Over the past three months, the yuan has gained 2.1% against the dollar. Take note though, that the majority of this rise has come over the past two weeks, during which there have been louder cat calls. Coincidence? I think not!
In any case, this clearly won’t cut it for U.S. officials. Since the beginning of the year, China has run up a trade surplus of $145 BILLION. U.S. officials pointed to this ginormous trade gap to highlight the competitive advantage that China gains by virtue of the yuan. U.S. manufacturers have also been complaining, which is why they have been pushing for the new bill to be passed.
With all the new developments, it looks like that tension between the U.S. and China is bound to heat up some more. Apparently, the U.S. is expected to use the upcoming G-20 meeting as an avenue to get the support of other major economies, particularly those in Europe and Asia. Once the November election ends, the Senate will discuss the China tariff bill and possibly make some changes to the proposal.
Don’t expect China to just roll with the punches without fighting back though. After all, China did say that its decisions regarding the yuan’s valuation would never be based on threats or pressure from the U.S. In addition to this, China’s Premier Wen Jiabao said in a recent meeting with President Obama that a rapid appreciation in the yuan could lead to a lot of lost jobs and bankrupt Chinese factories.
How the whole issue will play out is still up in the air, but hopefully, both nations will be able to settle the issue peacefully.