The serious business of tariff threats
From Lindsey Graham:
U.S. Senator Lindsey Graham (R-South Carolina) today joined with Senator Charles Schumer (D-New York) to introduce legislation placing a 27.5 percent tariff on all Chinese goods entering the United States. The tariff legislation is in response to China’s decision to continue pegging their currency at a rate of 8.28 yuan to $1 American dollar. “It’s pretty simple – China cheats,” said Graham. “They artificially peg their currency below its true value making their goods cheaper. “Words alone will not change China’s behavior,” said Graham. “We’ve talked this issue to death. It is now time to act.”
The Chinese response, from Peoples’ Daily:
“This is an old trick of the United States to make currency politicized,” said Li Yang, head of Institute of Finance of Chinese Academy of Social Sciences. In 1980’s the United States also criticized Japan on currency matters. Yang said, “What the United States has done is to claim that because China has gained great profits from controlling its exchange rate, it should be responsible for trade deficit of the United States.”
“However, whether China revalues its currency or not will not be helpful for the United States to solve its financial and trade deficit problems. This is because the deficit is rooted in the structure of the United States, that is, the imbalance between savings and investment.” Thursday, Qin Gang, spokesman of the Foreign Ministry, in response to the new bill, said, “If one country’s fiscal deficit could not be made up by its own private savings, it has to go to foreign exchange inflows, which usually causes deficit problem in current account. he United States should look more into domestic means to restore its economic balance.”
If push came to shove and a tariff of this magnitude were actually enacted, it would be a major lose-lose for both China and the US. We question the wisdom of threatening to shoot a guy when the bullet that kills him will kill you too.