Friday, September 24, 2010

Currency Reform – Let’s Be Careful What We Ask For

Risk assets are flying, and it’s a feel good autumn Friday. One of the headlines that may quietly pass by on this feel good day is that the House Ways and Means committee approved legislation aimed at putting pressure on China to raise the value of its currency. One of the things this legislation would do is allow companies to petition for higher duties on imports. While China currency bashing seems very pro-American on the surface, especially at a time of such high structural unemployment and a decline in our manufacturing base, I have to wonder who is really going to win if a trade war heats up between the U.S. and China.

Yes, I love America and think we should pressure China to more freely open up their markets and accept more U.S. imports. But duties on Chinese imports? Let’s be careful here. Job losses are still high, incomes are still suffering, and consumer confidence is still quite low. If things aren’t tough enough now, what’s the mood going to be like when Wal-Mart is forced to pass on the increasing prices of Chinese goods to consumers who are already feeling strapped as it is?

I’m not saying that some global rebalancing of growth doesn’t need to occur, but starting a trade war doesn’t sound too attractive to me from a U.S. consumer perspective. They say history doesn’t repeat, but often rhymes. Let’s hope this legislation doesn’t end up rhyming with a previous tariff bill known as Smoot-Hawley, which was passed in the 1930s. I don’t believe that worked out too well…