Overnight, the United States Congress voted overwhelmingly for legislation to punish China over the strength of the renminbi.
If, and it is a big if, the bill passes through the Senate and then gets approved by the White House, the US will apply levies to Chinese products to compensate for the undervaluation of the renminbi.
Since no one agrees on how much the renminbi is undervalued, that will be an interesting process to observe.
At any rate, the bill has missed its slot for getting through the Senate in this calendar year, since Congress is about to adjourn for mid-term elections and the bill needs to be rewritten to match the version which has been filed at the Senate.
After the elections are over, the passage of the bill may be slower, and it could be challenged by China in the WTO. Each industry would also have to work out how to apply the legislation if it ever passes into law, which could take a while.
With the elections coming up, the bill was a political no-brainer for Congress – it allows Congressmen to campaign that they are trying to protect their constituencies from "unfair" Chinese competition.
However, it is pretty obvious to most observers that the US no longer manufactures most of the goods that it imports from China. It has long since moved up the value chain and away from cheap manufacturing. In fact, if the renminbi appreciates, American consumers could find the price of the goods they buy in places like Wal-Mart goes up, which would hardly help the US economy.
Nevertheless, the bill gives the US a good bargaining chip in its negotiations with China, and it’s likely the Chinese will seek to head off the issue by allowing the renminbi to gently rise a bit more. Another side effect is likely to be a rise in imports to China to rebalance trade further.
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