Playing chicken with China

Given the state of the American economy I've been expecting talk of protectionism in the U.S. but I didn't expect to hear it from the original boosters of free trade.

A man-bites-dog story of momentous implications is unfolding in Washington: The US multinational establishment, having successfully championed free-trade orthodoxy for decades, may now be flirting with protectionist heresy -- a stiff tariff against China to stanch America's hemorrhaging trade deficits. Fred Bergsten, the multinationals' leading economic authority, warns that the United States is in "big trouble," taking on foreign debt beyond anything any industrial nation has experienced and comparable to Mexico and Thailand just before they crashed in the 1990s. Bergsten, director of the Institute for International Economics, is lobbying elite circles to demand decisive action by the Bush Administration -- an "import surcharge" as high as 50 percent on all Chinese imports -- to avert financial meltdown.

Does he really mean to slap a 50% tariff on all goods coming from China? Won't that cramp Wal-Mart's style?

Of course legislators probably wouldn't consider a surcharge that high. How about something just a bit less onerous?

Meantime, a bipartisan group of senators -- nine Democrats, five Republicans -- has introduced Senate Bill 295, which targets China with a 27.5 percent tariff. Charles Schumer, the lead sponsor, calls it "a tough-love effort." The co-sponsors include Democratic minority leader Harry Reid and, more surprising, Hillary Clinton, a longtime free trader close to financial leaders like former Treasury Secretary Robert Rubin, now an executive at Citigroup. The bill lets politicians express solidarity with constituents who lost their jobs, without offending big hitters.

The author of the article, William Greider, speculates that we could be seeing "the start of a break from the era of US-led globalization." But he also points out that for Bergsten, at least, the tarrif proposal is an opening move and not necessarily the final goal.

Bergsten's strategy -- threatening tariffs -- is meant to bluff China and other Asian nations into letting their currencies appreciate and allowing the dollar to fall much further so the US trade deficits will shrink, at least enough to avert a financial crisis. The strategy is also designed to light a fire under George W. Bush. "It is virtually inconceivable," Bergsten wrote in the Financial Times, "that the Bush Administration could skate through four more years without addressing these issues decisively."

And the proposal from the legislators fits in quite nicely with that plan.

Schumer's bill provides for a six-month negotiating period -- time enough for Beijing to relent -- before the ax would fall (other Asian nations can't move on currencies unless China does because they'd lose their own export sales to Chinese goods).

What if Beijing doesn't want to relent? China holds a large chunk of American debt. If the Chinese decide to stop buying American T-Bills the U.S. could have an even bigger problem on its hands. So Beijing has a little leverage of its own.

There's no certainty that even the lower tarrif will be applied but take this as another sign that there's serious and growing concern about the American current account deficit. When Paul Krugman compared the U.S. to Argentina a while back, people called him shrill. He doesn't seem so shrill anymore. Or at least he's not alone since even heavyweights in corporate circles are considering playing a dangerous game with China in an effort to find some way out of the mess the American economy seems to be headed for.

And as Greider points out, there's political risk here too.

When "responsible" players break the taboo and talk up tariffs, it could ignite a more honest public debate on globalization. The major news media seem not to have noticed that Democratic leaders and some conservative Republicans are waving the big stick. The establishment probably prefers that this remain an inside-the-Beltway story. Why confuse the public with front-page stories explaining that tariffs are actually useful and legal? Organized labor and others should make sure this story becomes big news. People might begin to ask deeper questions. If free-trade agreements are the road to greater US prosperity, how did the United States wind up in this deep hole? If the government is willing to invoke the tariff weapon to protect US financial interests, why can't it use it to protect US workers and jobs? Why does US trade policy serve the multinational interests but not the nation as a whole?

So where does that leave Canada? If the real goal of those who are pulling the strings in the U.S. is to see the American dollar slide more quickly, pushing our own dollar up in relation to it, we lose a big advantage in our trade with the U.S. If there's serious discussion of using protectionist measures to protect American jobs we could see even more disputes like softwood lumber. And if the Americans gamble and lose or fail to act soon enough -- if financial meltdown occurs -- it only gets worse.

This is the economy which John Manley and Tom d'Aquino -- not to mention Paul Martin -- want us to depend on even more than we already do. Is there a Plan B?

Hat-tip to Susan at Suburban Guerrilla.

Cross-posted at the E-Group.