24/7 Wall St.

A trade war between the US and China, with tariffs and taxes, recriminations and retaliation, may be a modestly troubling prospect compared to a currency war.

China’s Commerce Minister Chen Deming said “The currency is a sovereign issue and should not be an issue to be discussed between two countries. He warned that if the US labels the world’s third largest nation by GDP a “currency manipulator” that China will take the issue to the international legal authorities, according to a report by Reuters.

The situation is likely to get much uglier than a day in court.

One hundred members of Congress have already sent Treasury a letter saying that they will press the currency and trade issue with China if the White House will not. Is it any wonder? The mid-term elections will swing to a large extent on unemployment, particularly if the heath care reform package is signed into law in the next month which would make it nearly academic as a campaign issue. China’s low-cost exports probably do hurt America’s ability to sell its own goods competitively in the global markets.

A currency war between China and the US seems inevitable now. China is unwilling to let the value of the yuan “float” and be determined though the normal forces of trade and currency trading. If the American government does plan to make a stand, it has no better time that to do it now  to strengthen its level of exports and use that to help the US economy recover. As a by-product, manufacturing jobs in America should pick up and unemployment should fall. One of the single largest issues facing job creation in the US is that the relatively high-paid factory job base has been decimated by the shuttering of many facilities in the auto industry. Most economists believe that those jobs will never be replaced. An improved ability of America to be competitive as an exporter of goods would bring back some of that worker base.

The Chinese government has little reason to back down on the yuan. Its economy depends on keeping its huge factory base operating as close to capacity as possible. And, the White House has said that exports are a critical factor to economic growth. The rate of economic growth in one country or the other has to give way.

Douglas A. McIntyre