And the trade war ball gets rolling...

House passes bill to urge China to revalue currency

By a 348-79 vote, the House approved the Currency Reform for Fair Trade Act, which gives the Commerce Department authority to impose import tariffs on goods from countries that manipulate their currencies to deflate them artificially.

Now that the U.S. is officially in the war, expect everyone to pick up the pace.

Brazilian Finance Minister Guido Mantega said this week he feels a quiet "currency war" is under way as nations try to maintain the competitiveness of their exports. Capital and investment are pouring into the faster-growing Asian and Latin American economies, putting upward pressure on those currencies. If China's yuan doesn't adjust to those dynamics, other countries are forced to try to keep their currencies cheaper as well — or risk losing ground to Chinese manufacturers.

Japan took the most overt step when it recently intervened to try to halt a steady rise in the value of the yen against the dollar, but nations such as Colombia and Peru also have been buying dollars to try to stem the appreciation of their currencies. Korea and Taiwan have been upping their holdings of foreign reserves, and officials in Brazil — whose currency has spiked more than 30 percent against the dollar in the past year and a half — have said they might need to become more aggressive.

What does the bill do exactly? Here's Reuters:

WHAT THE BILL DOES

The legislation essentially clears the way for the Commerce Department to apply countervailing duties against imports from countries with "fundamentally undervalued" currencies.

The bill's key element instructs the Commerce Department that it may no longer dismiss a request for countervailing (or anti-subsidy) duties based on the single fact that exporters are not the sole beneficiaries of a particular subsidy.

In other words, just because Chinese domestic manufacturers may also benefit from currency undervaluation, the Commerce Department could still consider it an export subsidy.

What is the Chinese response?

China says U.S. yuan bill violates WTO

In response, the official Xinhua news agency quoted China's commerce ministry spokesman, Yao Jian, as saying: "Starting a countervailing investigation in the name of exchange rates does not conform with relevant WTO rules."

The lawyer-like statement was a measured response compared with China's reactions in other disputes this year, including U.S. weapons sales to Taiwan, when Beijing froze military contacts with the United States.

"I don't think China will have any dramatic reaction to this bill's passing," said Jin Canrong, a professor of international relations at Renmin University in Beijing, who specializes in U.S.-China relations. "China wants to preserve the stability of overall relations."

Appealing to the WTO just escalates the situation. Not because the U.S. would view turning to the WTO as an escalation in and of itself, that's the way countries deal with trade disputes. It would be an escalation because the declining social mood will eventually lead Americans to ask why the U.S. belongs to the WTO.

Perhaps the best response is to say and do nothing. Declining social mood is going to keep pushing this ball forward and the only way to prevent it from concluding with the dissolution of the WTO and a permanent plunge in global trade (if we have passed a grand supercycle peak and have entered into the worst decline in social mood in 200 years) is for one or more countries to refuse to engage in tit-for-tat behavior.

There's a small possibility of the U.S. stopping this trend. House Republican leaders voted against the bill (Boehner, Pence, Cantor and Ryan), along with many of the more famous Republican members (Ron Paul, King-IA, King-NY, McClintock, even Bachmann), and Republicans made up three-quarters of the opposition—although a majority of Republicans still voted for the bill.

More evidence that Mao was correct to prefer Rightists and Republicans?

Chairman Mao: Those questions are not questions to be discussed in my place. They should be discussed with the Premier. I discuss the philosophical questions. That is to say, I voted for you during your election. There is an American here called Mr. Frank Coe, and he wrote an article precisely at the time when your country was in havoc, during your last electoral campaign. He said you were going to be elected President. I appreciated that article very much. But now he is against the visit.

President Nixon: When the President says he voted for me, he voted for the lesser of two evils.

Chairman Mao: I like rightists. People say you are rightists, that the Republican Party is to the right, that Prime Minister Heath is also to the right.

President Nixon: And General DeGaulle.

Chairman Mao: DeGaulle is a different question. They also say the Christian Democratic Party of West Germany is also to the right. I am comparatively happy when these people on the right come into power.

President Nixon: I think the important thing to note is that in America, at least at this time, those on the right can do what those on the left talk about.

Dr. Kissinger: There is another point, Mr. President. Those on the left are pro-Soviet and would not encourage a move toward the People’s Republic, and in fact criticize you on those grounds.

Chairman Mao: Exactly that. Some are opposing you. In our country also there is a reactionary group which is opposed to our contact with you. The result was that they got on an airplane and fled abroad.