Tags: Roach | China | trade | war

Stephen Roach: Disastrous Trade War With China Looms

Thursday, 23 Aug 2012 08:59 AM

Stephen Roach, former Chairman of Morgan Stanley Asia and current Yale professor, warns that a disastrous trade war between the United States and China looms.

“The United States and China are poised at the top of a very slippery slope,” Roach writes in the Chinese financial website Caixin.com.

Both economies have old growth models that have been taken to excess and must be replaced by new models, he notes, and both governments are experiencing some sort of leadership changes.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

“This combination of mounting economic tensions and leadership transitions heightens the risks of a destabilizing shift in the relationship that has a nontrivial chance of sparking a trade war,” says Roach. “In any war, there is always the saga of the itchy trigger and the first shot.

“With America still licking its wounds several years after the Great Crisis, there is no shortage of itchy fingers in Washington.”

Roach says the following scenario is all too likely: Following his January 2013 presidential inauguration, Mitt Romney issues an executive order declaring China guilty of manipulating its currency.

“In accordance with the Omnibus Trade and Competitiveness Act of 1988, that charge triggers immediate high-level negotiations between U.S. Treasury officials and their Chinese counterparts at the Ministry of Finance,” writes Roach. “Not surprisingly, the negotiations stall and both parties blame the other in vitriolic press releases.”

Roach foresees the confrontation growing even more hostile, with Washington slapping immediate tariffs of 20 percent on Chinese goods entering the United States and Beijing filing a charge of economic war against us with the World Trade Organization before creating retaliatory tariffs of 20 percent against all U.S. exports headed to China.

“No, this hasn’t happened — at least not yet,” he says. “Hopefully, saner minds will prevail, allowing Washington and Beijing to step back from the brink.

“But this bad dream comes with an important lesson: Both economies continue to struggle, trapped in antiquated growth models that are not delivering the prosperity that politicians continue to promise.”

According to The Wall Street Journal, U.S. protectionist trade policies toward China and legislative efforts to punish Beijing for alleged currency manipulation would only hurt Americans’ own interests.

Targeting Chinese imports seems particularly imprudent since so many U.S. exports are components for the products America ends up importing again. And that’s not to mention the retailing, transportation, marketing and other jobs that rely on those Chinese goods, the newspaper says.

About 55 cents of every dollar that the United States spends on goods that are made in China go to Americans who design, ship and market those products, according to a study last year by economists at the San Francisco Federal Reserve cited by The Journal. On top of that is the boost to the improved standard of living derived from cheaper consumer goods, as low-cost Chinese imports hold down U.S. prices for consumer goods.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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2012-59-23
Thursday, 23 Aug 2012 08:59 AM
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