How to Start a Trade War

The Wall Street Journal

When it comes to the debate over China's currency, the voices of moderation are getting edged out.

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Now that the House of Representatives has voted, with strong backing, in favor of legislation that would allow the U.S. to levy tariffs on Chinese goods, a trade war is one step closer. Much depends on whether China can stay measured in its response.

Calmer heads in Beijing will see that the House's latest move has much to do with political posturing ahead of U.S. mid-term elections. The bill seems unlikely to make it through the Senate, let alone past President Obama's desk, this year. That it has already been watered down so that the Department of Commerce isn't required to impose tariffs on countries with "unfair" currency practices is another important subtlety.

The best response China can provide now to cool the situation is to accelerate the pace of yuan appreciation against the dollar in the coming months, giving moderates in the U.S. government an argument against further action. China has in recent times responded to external pressure on its currency by allowing the yuan to rise.

Certainly, there are progressives among those making yuan policy. Hu Xiaolian, deputy governor of the People's Bank of China, recently outlined the benefits to China of a more flexible currency regime in a series of essays published on the central bank's website.

But there will be strong voices in Beijing keen not to give the impression it's being pushed around by U.S. politicians. As a recent diplomatic spat with Japan shows, Chinese leaders are in a somewhat forthright mood.

This is not to mention that the collective international pressure on China has weakened substantially in recent weeks. With Asian countries, most notably Japan, also stepping into currency markets, China's policy stance is looking ever less exceptional. Hawks in Beijing will note, too, that recent yuan appreciation has been dismissed in Washington as being just for show.

Damned if it does, damned if it doesn't, Beijing may feel it has nothing to lose in standing up to U.S. pressure. Unfortunately, it is from such attitudes that trade wars are hewn.

Write to Andrew Peaple at andrew.peaple@dowjones.com

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