Persistently high unemployment and a weak economic recovery could persuade U.S. policymakers to slap protectionist duties on imports from China and around the world, an economist said on Tuesday.
Trade protection is far from an ideal policy, and indeed it carries serious dangers, but in current circumstances it may offer America the only way out of its difficulties, Paul Ashworth, chief U.S. economist for Capital Economics in Toronto, said in an analytical note.
Having largely exhausted fiscal and monetary tools to boost U.S. economic growth, Congress and President Barack Obama might realistically look at trade measures aimed at negating China's currency-derived trade advantage, Ashworth said.
Possible Republican presidential candidate Donald Trump has already called for the United States to slap a 25-percent tariff on Chinese goods, a move that would violate U.S. commitments made to the World Trade Organization.
Senate Majority Leader Harry Reid and other lawmakers just returned from Beijing said on Tuesday they pressed China to allow its currency to rise more rapidly in value to help bring trade between the two countries into balance.
China's currency policy has resulted in an unbalanced exchange rate that keeps the cost of Chinese products artificially low and the cost of U.S. exports to China unfairly high, making it difficult for U.S. businesses to compete with China in the global also marketplace, the lawmakers said in a statement that noted Beijing had confirmed plans to continue a managed appreciation of its currency.
Ashworth noted that even with the current weak U.S. recovery, the U.S. trade deficit has already widened again to more than 3 percent of gross domestic product and could once again reach its previous peak of 6 percent of GDP.
That could lead lawmakers to consider tariffs as a way to narrow the deficit, most likely starting with legislation that would clear the way for the United States to use countervailing duties against China's undervalued exchange rate, he said.
As it stands now, we could see such a bill being passed some time in 2012 when the (presidential and congressional) election campaign is in full swing, Ashworth said.
When such limited measures do little to stem the rise in the overall trade deficit, or possibly even the bilateral deficit with China, we would expect Congress to agree to a wider set of sanctions targeting either China alone or possibly a wider range of low-cost Asian producers, he said.
Since that would most likely run afoul of WTO rules, the logical next step would be a U.S. debate on whether to withdraw from that organization, he said.
The preferred solution would be for China to take steps to boost its domestic demand, such as allowing its currency to appreciate more substantially against the dollar, he said.
The second-best solution would be for the United States to offset China's currency advantage by slapping tariffs on its goods, Ashworth said in a phone interview.
(Reporting by Doug Palmer; Editing by Chizu Nomiyama)