China Redux

Ridiculous Headline of the Day (via People’s Daily):

China, Sudan vow to boost military exchange

“Military relations between China and Sudan have developed smoothly,” said Chinese Defense Minister Cao Gangchuan at a meeting with Chief of Joint Staff of Sudanese armed forces Haj Ahmed El Gaili.

China and Sudan have enjoyed profound friendship though the two countries are far apart, said Cao, who is also vice chairman of the Chinese Central Military Commission and state councilor.

China cherished the traditional friendship with Sudan and would like to further promote bilateral cooperation in various fields, said Cao.

News of Commerce’s decision to impose countervailing duties on imports from China has set the blogosphere astir. Among the most interesting are China Hearsay’s post on the legal justification for the action against glossy paper imports from China, and China Matters’ political background on the case (here).

This is definitely a big deal, no less because it is the first time that countervailing duties will be imposed on imports from a non-market economy. How far will enforcement go? As China Matters point out, the action against paper imports could theoretically be applied to an array of Chinese goods. So while this is one small step towards towards protectionism, it could lead to one big leap.

Countervailing duties are perhaps the ultimate political and economic weapon in trade wars, and the Bush Administration has apparently decided to trot out its trump card. CVD duties would result in significant increases in the cost of Chinese goods, while marshalling domestic political support by creating the perception of a more level playing field for American manufacturers.

While there’s been no official response from China as of yet (the move was announced on a Friday afternoon, a favorite administration tactic and a sign of some sheepishness on its part), I imagine this puts the fear of God in them. China can either call the bluff, complain to the WTO, and see how far this thing goes, or it can accede to US pressure by revaluing the yuan. Either way, the move represents significant, tangible external policy pressure on the Chinese government, which they are bound to deplore. It’s one of the Chinese government’s pet peeves.

The reality is that no matter how the CVD duties are applied and how this plays out, CVDs are reactive measures that fail to address underlying economic conditions. So Commerce’s tactic could force China to rethink and accelerate the pace of its currency reform. And then what? As numerous economists have shown, appreciation of the yuan will not fix the US trade deficit. It could make loads of goods more expensive for US consumers. And neither currency reform nor CVDs are going to bring back manufacturing jobs to the US.

Ultimately, countervailing duties and/or currency reform will not alter the global economic landscape in a significant way. Imposition of CVD duties, however, could buy valuable time for US politicians and businesses as they figure out a strategy to compete more effectively with rising China. If that’s the strategy, it could be a long, ugly struggle. But someone better come up with a different set of tactics for increasing US competitiveness, rather than simply reacting to China’s gains.