Proposed tariff against China threatens deposit rates
October 21, 2011
In a rare show of bi-partisan support, the Senate last week passed a bill that would set the stage for tariffs on goods from China. Neither the House of Representatives nor the White House seem to share the Senate's enthusiasm for the measure, which is fortunate, because it could be bad for the economy in general, and hard on CD, savings, and money market accounts.
The Senate's bill is retaliation for China's manipulation of its currency. Critics of the trade relationship with China charge that by keeping its currency low relative to the U.S. dollar, China is making it easier for its manufacturers to compete with U.S. companies. The Senate wants to fight back with tariffs against China, making their goods more expensive in America. Here are two reasons that could backfire:
- China can be an engine of global growth. China, like Brazil, Russia, and India, represents a key force in the world economy as an area with both a huge population and a rapidly developing economy. With the U.S. in a slow-growth mode, erecting trade barriers against the high-growth economies of the world could be self-destructive in the long run. Slow growth has already caused CD, savings, and money market rates to drop down near zero; locking in slow growth through protectionism could well mean locking in low interest rates.
- Tariffs on Chinese imports would be inflationary. Making Chinese goods more expensive wouldn't suit American consumers very well, and the resulting inflation would be yet another burden on people who are already seeing their savings accounts losing purchasing power.
A trade relationship, especially with a country going through the dramatic political, cultural, and economic transitions that China is experiencing, is both dynamic and sensitive. There are subjects that need to be addressed--in particular, the intellectual property protections that would help U.S. companies capitalize on the emerging consumer market in China. So expect the U.S. trade relationship with China to keep evolving through periodic negotiations. But the U.S. should remember that, in trying to shape something as delicate as this trade relationship, a hammer is not the right tool to use.
