Has the great globalization experiment been terminated? Will it all be rolled back? And if yes, rolled back to what? Can we even imagine a de-globalized world vividly enough to understand it's implications? These questions and more, are haunting both supporters and opponents of US protectionism today.
Unbelievable as it is, protectionist voices in the US are gaining ground. What was once a cathedral to free markets is now turning away from it's beliefs. And the reason, or so they would have you believe, is alleged currency manipulation by China. The background to this has been discussed in detail in an earlier post, China's Currency Policy, The Financial Crisis and the Future of Financial Reform. In summary, US Dollar purchases by China, an attempt to prevent the Yuan from appreciating, has distorted the perfect markets required for "efficient globalization".
The solution, according to these protectionists, is de-globalization. They propose to levy a penalty of 25% on all goods imported from China. In their opinion, this could incentivize, or force, China to stay out of it's currency market, which it intervenes in consistently and on an unprecedented scale.
The implications of this discussion go beyond just US and China. If the US were to label China a Currency Manipulator, Europe won't be far behind. Lower demand for their goods could result in the Chinese economy contracting and force China to respond. But it's ability to respond economically is limited. It is the world's production unit and it's economic survival is dependent in exports so a reciprocal import penalty on US goods won't serve any purpose. It is the largest lender to the US and could sell it's holdings of US Treasuries, drive up interest rates in the US and then sell US Dollars to weaken it. But that would only mean a stronger Yuan which would be the opposite of what it needs to support exports. So how can it respond? Militarily? Opponents of protectionism Seem to believe this could be an option, but it isn't something that I can elaborate with expertise...
Moving on, if the US succeeds in it's attempt to force China into doing it's bidding, will it stop there? There are more countries that the US blames for it's economic woes. India's one of them and can very easily be designated a Currency Manipulator, because pretty much like China, it is one.
And Many countries in Europe believe that Germany exports far more than it should to the rest of them. Right now, as part of the EMU, they have no protection, but the EMU isn't cast in stone. If countries could opt in, they can opt out as well. Will protectionism result in a disintegration of Eurozone?
The point is, a protectionist step by the US would give legitimacy to protectionist forces everywhere. And unleash a slew of legislation aimed at protecting domestic economies from foreign competition. Once set in motion, this movement's path cannot be predicted, or even imagined, with any degree of accuracy.
As of now, more than 130 US Senators (Democrats as well as Republicans) have introduced a Bill in Senate seeking levy these penalties on Chinese imports. Most of them have also signed a letter to the US Treasury Secretary and the US President asking the administration to act against China. On April 15, 2010 the US Treasury Department will release it's semi-annual report on global currency management practices and it is widely expected that this report will label China a Currency Manipulator. If this were to happen, the China Currency Manipulation Bill will gain credibility and find the bipartisan support that it needs. Leaders of the group of 130 are expecting that this bill will become law by the end of May 2010. Which gives us just over 2 months to prepare for a strange unknown world.
A De-Globalised World.