Can Obama Dispel Clouds of Trade War?
Below the excitement over health care and financial reform, Congress has just delivered early notice of the top economic issue of the second half of this year: trade.
On Monday, 130 members of the House of Representatives signed a letter protesting China's manipulation of its currency to make Chinese goods seem cheaper.
This helps China's exports and disadvantages U.S. competitors.
In a more normal world, China's big trade surplus with the United States would lead to a big accumulation of dollars in Chinese banks. Directly or indirectly, the owners of those dollars would sooner or later spend them on American goods or services, correcting the trade imbalance.
But it is not a normal situation. China acts to force the dollars' owners to leave them in banks controlled by the government. There the dollars are used to purchase American debt, not American goods.
That's not good for either country in the long run. But with millions of Chinese moving to the cities every year to look for work, China cannot worry about the long run. In the short run, it must create jobs for its urban millions.
The undervaluation of China's currency creates those jobs, but at the expense of American workers: By one credible estimate, the manipulation has cost some 1.4 million American jobs.
It would be illegal under World Trade Organization rules for China to directly subsidize exports. But China's currency shenanigans have the same effect.
Back in the 1980s, the United States and Japan settled differences over currency reasonably amicably. But Japan is a friend and ally. China is something else.
Never mind Israel-Palestine. The real test of President Obama's peacemaking leadership will be his ability to dispel the clouds of trade war now gathering over the Pacific Ocean.
Originally broadcast on Marketplace.