The Problem
The U.S. House of Representatives last week passed H.R. 2378, the Currency Reform for Fair Trade Act, by a vote of 348 to 79. Before we even tackle the actual bill, there has to be a reason to to impose a tariff on Chinese goods. The U.S. isn't just trying to stir up business and tax goods on Chinese imports and exports for nothing.
This all relates to the current value China has placed on their Renminbi, the official currency of the People's Republic of China, who's principle currency is the Yuan. Unlike most countries, the Renminbi is not a floating currency. A floating currency allows for a fluctuating exchange rate wherein a currency's value is allowed to fluctuate according to the foreign exchange market. The United States dollar, the euro, the Japanese yen, the British pound, the Swiss franc and the Australian dollar all use a floating currency. A floating currency adjusts appropriately to inflation, interests rates and exchange rates. 
The Chinese government has been accused of undervaluing the Renminbi for quite some time. As of today, 1 Chinese yuan = 0.1495 US dollars. Why would a country do this? Purchasing Power Parity (PPP), the theory of long-term equilibrium exchange rates based on relative price levels of two countries. Therefore, the price of a say a bushel of wheat, aside from transaction costs, should be of the same value from one country to another. Or in China's case, where the Renminbi is considered undervalued, that same bushel of wheat is actually worth more and thus costs more from than the US dollar. In fact, the GDP per capita of China is about $1,800, however with the Renminbi and PPP, its actually more like $7,200. That's a pretty big difference. Chinese exporters have benefited hugely from an undervalued currency; along with productivity gains, the country has for years produced monster trade surpluses, and boasted the world's highest levels of foreign exchange reserves. The majority of these reserves are held in US dollars, mainly US government bonds.
The Bill
The U.S. is trying desperately to save its economy.
Fresh from the great recession, the country is looking anywhere to avoid slipping into another and going back even further, creating possible irreparable damage. The U.S. has a huge unemployment problem and with cheap labor and cheap goods available in China, corporations can't avoid the fact that outsourced labor and imported goods are much more friendly on the bottom line then paying a more skilled US labor force. Therefore, congress is proposing this bill as a way to bring back jobs to the US. Yep, another jobs bill. The Positives
OK, yes it could potentially bring hundreds of thousands of jobs back to the states, which would lower unemployment, boost consumer spending, and generally fuel our economy with U.S. dollars. I'll stick with the positives for now. If you think, we're back to the glory days of the mid-90's, think again. Our unemployment issue is and will be a huge problem going forward in this country. We are moving from an economy built on manufacturing and services, to a technology and entertainment/consumer discretionary driven society. Want proof? Exxon makes up the greatest share of the S&P 500, however Apple is poised to take over that spot. If Apple becomes more valuable than Exxon, it will be only the second time that a growing technology company which doesn't pay dividends will make up the greatest share of the S&P 500. The first, Microsoft Corp., held the position for two years in the late 1990s during the boom that made personal computers a staple in households around the world. So if we're moving towards a digital world, we are also moving towards a highly skilled workforce. Which leads to my next point below.
The Negatives
If we're moving towards a mid-to high level skilled workforce, how will creating a tariff on exporting Chinese goods help the US job force? The theory for the bill holds that the cost of exporting goods from China would be more than the cost of supplying the goods domestically. But when we compare the labor force of China to the US, that's where the disparity and holes of the bill start becoming more apparent. A lot of the goods that we receive from China are made in factories that pay their workers peanuts on the dollar and their government has no incentives to change this because the demand for jobs easily out weighs the standard of living. Where in the US, people are much less likely to take minimum wage jobs or less when you consider the cost and standard of living that the US is so famous for. Even more so, our unemployment benefits often outweigh the alternative of a lower paid, lower skilled job. Furthermore, American corporations may just shift their outsourcing to Indonesia, Vietnam, or the Philippines who would offer just as cheap labor as China and provide the same outputs, avoiding increased labor costs of a US workforce.
There's also the undeniable fact that we absolutely need imports to survive.
The US is rich with natural resources, but could not sustain the beast that is the US consumer without help from the rest of the world. And who lists the US as its biggest importer? Yep, you guessed it, China, something to the tune of $220 Billion in US dollars last year alone, of which the highest imports were electrical machinery and equipment. Do you see where I'm going with this? The US may hold the power in creating a tariff against Chinese imports/exports, but the Chinese have just as much power in deciding how what to do with those and where to export. The ramifications are wide-spread. Not only could the bill have a reverse effect on job creation, it could, I mean, it already has, pissed China off. The Chinese Foreign Ministry spokesperson had this to say:
"We firmly oppose the US Congress approving these bills. Exercising protectionism against China under the excuse of the renminbi exchange rate will only severely damage China-US trade and economic ties and have a negative impact on the two countries' economies and the world economy. The US bill is inconsistent with relevant rules of the World Trade Organisation to conduct an anti-subsidy investigation based on exchange rate reasons. China has never undervalued its currency in order to gain a competitive advantage. The US cannot use its trade deficit with China as an excuse to adopt trade protectionist measures."
In supposedly unrelated news today, China is imposing import tariffs on US poultry of up to 105.4%, according to the country’s Ministry of Commerce. Chinese officials denied that the inquiry was in retaliation for the US imposing tariffs on Chinese tires, but poultry is one of the few categories in which the US runs a trade surplus with China, making it an ideal target for Chinese trade actions. Whether this is true or not, the wars have begun.
Look, the US is dead right that China is undervaluing its currency. Maybe someone needed to step up and put their foot down and the US, still holding onto that title of leaders of the free world, is the one who fits the bill so to speak to do so. However, the US could be engaging in a very slippery slope. One that could turn ugly if China retaliates with their own tariffs, thus just cancelling the US plans and raising taxes for everyone, which could in turn hurt US consumer spending, of which 70% of our economy is fueled by. Here's hoping I'm proved wrong.
Hope you enjoyed the read and maybe learned a few things in the process.
till next time, ride the wave and remember only you can prevent forest fires.
bsv
the courtesy wave
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