When times were good, it was easy for America to overlook the effects of China’s currency manipulation. U.S. unemployment hovered around 5 percent, and growth averaged about the same. Even though U.S. jobs got shipped overseas, cheap Chinese imports flooded the markets and softened the impact of declining consumer purchasing power. China helped to further bolster our consumption by purchasing more than a trillion dollars in U.S. debt.
Times have changed. With official unemployment hovering at around 10 percent, and inflation near zero, China’s currency manipulation poses a severe problem to the U.S. recovery. Cheap Chinese imports — cheapened by the subsidies China gives to its producers — prevent U.S. manufacturers from producing and selling goods in the United States. This makes a recovery in domestic employment all the more difficult.
It appears the two nations’ interests have diverged to the point where a trade war is almost inevitable. We see the opening salvos already. China’s recent announcement that it will restrict rare earth mineral exports is basically a move against Japan, a U.S. ally in the G-20 coalition of industrial economies. The Chinese premier is going around embracing the Greek government, offering to buy worthless Greek bonds — again to try to weaken the U.S. coalition within the G-20. In a further saber-rattling maneuver, China banned imports of chicken feet from the U.S. — a food considered a delicacy in China, but a useless byproduct of poultry production in the U.S.
For its part, the U.S. has signaled that it is willing to do whatever it takes to cheapen the value of the U.S. dollar. The Federal Reserve has significantly increased its production of money in the past two years. As a result, the purchasing power of the U.S. dollar has plummeted versus other world currencies. The value of all the Treasury bonds the Chinese purchased has similarly plummeted. The Chinese government grumbled early this year — encouraging the U.S. to be a more responsible debtor. The west countered by awarding the Nobel Peace Prize to a jailed Chinese dissident.
Neither side wants to resort to the nuclear option — outright trade restrictions. Banning Chinese imports would have immediate and drastic effects on the Chinese economy. Factories would close. Millions of people would become instantly unemployed. And a rapidly developing Chinese consumer base would essentially disappear overnight.
On the U.S. side, further reductions in the value of the U.S. dollar would hurt savers, especially seniors who have saved for retirement by investing in U.S. bonds. Furthermore, U.S. retailers would see a drastic increase in costs. Inflation would rise rapidly, and consumer purchasing power would plummet.