The Coming Trade War

We write today’s edition with the ghosts of Smoot and Hawley lurking over our shoulder. And Winston Churchill whispering “jaw-jaw” is better than “war-war.”

Jawing is what United States and China have been doing for the last 24 hours. Very indirect, beating-around-the-bush jawing, but jawing nonetheless.

Yesterday, President Obama told Senate Democrats he hoped to pressure China to abide by trade agreements, without specifying what agreements China was breaking or how. And then he implied the U.S.-China trade balance is out of whack because the yuan is overvalued relative to the dollar, without mentioning China by name.

US-China Trade Balance

“One of the challenges that we’ve got to address internationally is currency rates,” said the president, “and how they match up to make sure that our goods are not artificially inflated in price and their goods are artificially deflated in price.”

Today, China hit back, with equally glancing blows. A spokesman for the foreign ministry said the value of the yuan is not the main reason for China’s trade surplus with the U.S., without specifying what that main reason is. He’d only say, “At the moment… the level of the yuan is close to reasonable and balanced.”

Ordinarily, we’d blow this off. A year ago, not-yet Treasury Secretary Tim Geithner dropped the incendiary term “currency manipulation” during his Senate confirmation hearings. He then backed off. And Chinese students laughed at him. You remember all that.

Back then, the Obamanians were high. They were going to rescue millions of homeowners from foreclosure. Thought they’d already whipped unemployment. And had a supermajority to cram health insurance reform through.

What a difference a year makes. Now the electorate is looking surly. Nothing like picking a fight with your largest creditor to get voters riled up again. Couple this latest exchange with the tension-building factors we cited on Tuesday — especially the sale of U.S. military equipment to Taiwan — and we appear to sit at a more delicate juncture than we did a year ago.

What a mess. But, oh, so much fun, too!

The Daily Reckoning