A few hours ago, the maniac simians at the Senate finally did it and fired the first round in the great US-China currency war, after they took aim at one of China's core economic policies, voting to move forward with a bill designed to press Beijing to let its currency rise in value in the hope of creating U.S. jobs. As Reuters reports, "Senators voted 79-19 to open a week of Senate debate on the Currency Exchange Rate Oversight Reform Act of 2011, which would allow the U.S. government to slap countervailing duties on products from countries found to be subsidizing their exports by undervaluing their currencies. Monday's strong green light for debate on the bill bolsters prospects it will clear the Democrat-run Senate later this week, but prospects for action in the Republican-controlled House of Representatives are murky. If the bill did clear both chambers, it would present President Barack Obama with a tough decision on whether to sign the popular legislation into law and risk a trade war with Beijing, or veto it to pursue a more diplomatic approach." The response has been quick and severe: "China's foreign ministry said it "adamantly opposes" a bill pushed by the U.S. Senate that will allow the United States to impose duties on countries that undervalue their currencies." And just because China is now certain that the US will continue with its provocative posture, most recently demonstrated by the vocal response in the latest US-Taiwan military escalation, we would not be surprised at all to find China Daily report that China has accidentally sold a few billions in US government bonds... just because.
Reuters explains why this is one issue in which the Senate and Congress may actually agree:
Passage of the bill by the Democratic-controlled Senate would send it to the House, which is run by traditionally free-trade-friendly Republicans.
A China currency bill passed the House last year with 99 Republican votes, but lapsed because the Senate took no action. This year, the bill already has more than 200 House co-sponsors and this week supporters expect to reach 218, the number needed to pass it.
However, House Republican leaders have not shown a great appetite to pursue currency legislation, and it is unclear if the bill would ever face a vote in that chamber.
House Majority Leader Eric Cantor, a key player in deciding whether the chamber will take up the bill, did not tip his hand on Monday, telling reporters he was watching the Senate debate and "curious, really, where the White House is on that."
Cantor, who voted against similar legislation a year ago, said he was "really interested to hear what impact that move will have and if there are any unintended consequences that may result."
Critics of the bill, including U.S. business groups, warn that the legislation, if enacted, would risk a trade war with China -- one of the fastest-growing markets for U.S. goods -- at a time when a sputtering global economy can least afford it.
The trade war may have already started:
The Emergency Committee for American Trade called the bill "a highly damaging unilateral approach that will undermine broader efforts to address China's currency undervaluation."
It also said the bill was unlikely to pass muster at the World Trade Organization and would open the door to Chinese retaliation "to the detriment of U.S. exports and jobs."
And if there is one thing China hates more than anything, it is being presented with no diplomatic choice, and appearing to bend to the will of D.C.
China rejects outside criticism of its yuan policies as interference in a sovereign decision and note that the currency has appreciated about 30 percent since 2005.
While similar bills have foundered in the past, jobs are such a hot topic heading into next year's U.S. elections that prospects may have shifted.
"On issue after issue, China is mercantilist, plain and simple," Democratic Senator Charles Schumer told the Senate.
Alas, when dysfunctional scapegoat politics enter into the equation, the worst possible outcome is guaranteed. Sure enough, China already responded:
In a statement posted on China's official government website (www.gov.cn) on Tuesday, foreign ministry spokesman Ma Zhaoxu warned the United States not to "politicise" currency issues.
He said the United States was using currency as an excuse to adopt protectionist trade measures that violated global trading rules.
"By using the excuse of a so-called 'currency imbalance', this will escalate the exchange rate issue, adopting a protectionist measure that gravely violates WTO rules and seriously upsets Sino-U.S. trade and economic relations," he said. "China expresses its adamant opposition to this."
Ma Zhaoxu repeated Beijing's position that it will continue to gradually reform its currency policy, "strengthening the flexibility of the renminbi exchange rate."
He urged U.S. legislators to "proceed from the broader picture of Sino-U.S. trade and economic cooperation" and "forsake protectionism".
However this ends, one thing is certain: it's all downhill from here, as both sides now push their luck to see just how far either one can go in the increasingly more tenuous Nash Equilibrium without the other one defecting, or being perceived as having done so.