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• China’s Assertiveness Could Lead to a Trade War with US March 18, 2010

  The Economist Intelligence Unit looks at the prospects for a trade war between the US and China in a new risk analysis.

  Highlights:

  It should be noted that there is no agreement among economists that China’s manipulation of its exchange rate is fully to blame for unemployment in the US …  But even were China to allow its currency to rise, there is a strong likelihood that China would remain a competitive producer of a large range of goods–and richer, higher-wage economies such as the US are unlikely to suddenly become competitive following a minor revaluation of the renminbi.

  As long as China is seen to be a free rider in the global economy and refuses to engage in meaningful co-operation on economic issues, pressure will continue to build for a US response. It is unlikely that a small move in the renminbi exchange rate would have much of an impact on the Chinese economy, and the refusal of the Chinese government to allow even a token, say 2%, revaluation of the renminbi so far reflects a determination not to be seen to be yielding to overseas pressure on its economic policy. … The perception is that a more assertive China is refusing to be helpful to the US where it could be.

  [IMAGE]The destructive potential of a US-China trade war is the key reason for believing that both countries will avoid ratcheting up tensions too far. However, China’s penchant for believing that every attempt to engage China in international co-operation is part of a plot to constrain its emergence as a great power represents something of a wild card.

  At the moment, the most likely scenario is that trade sanctions will broaden out to a few more products, but that self-interest and mutual interdependence will play a role in keeping the situation within rational bounds. However, as long as China’s export growth and foreign-exchange accumulation remain high, unemployment in the US remains high, and the final fully sustainable recovery from the recent global downturn remains elusive, pressure will be build on the US administration to take action to bring China into line.

  For details see: World risk: Alert – China’s assertiveness could lead to a trade war (Premium)
  

  Technorati Tags: china, PulseCheck, renminbi, trade, US, US-China

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