The potential for a full-blown trade war with China may be heating up. On Monday the Senate supported a bill that would punish countries with undervalued currencies with trade sanctions — i.e. China. (See: Trade Wars? Senate Backs Bill Aimed at China's Currency Manipulation)
After China vociferously opposed the Senate's move to bring the bill to the floor for a vote, Federal Reserve Chairman Ben Bernanke waded into the discussion and no doubt added fuel to this fire. He essentially put blame on China's currency manipulation for preventing a more normal global recovery.
"Right now, our concern is that the Chinese currency policy is blocking what might be a more normal recovery process in the global economy," Bernanke told a congressional committee on Tuesday, reports the FT. "It is to some extent hurting the recovery".
Thomas Friedman, New York Times columnist and co-author of the new book, That Used to Be Us, joined Yahoo!'s The Daily Ticker to also weigh in on the subject. His big contention is that trade policy is not a one-sided, one-way street.
"There certainly seems to be a broad consensus that the Chinese have systematically undervalued their currency in order to promote their exports," says Friedman who is quick to acknowledge that he is not an expert on the subject, even though he is known for books and columns on the impact of globalization. "[But] it's kept not only a lot of the manufactured things from China that we import and use in everyday life much cheaper. Then they have taken that money and bought t-bills and have kept interest rates down and allowed your mortgage to be what it is today."
For those who support the new law, Friedman has some words of caution.
"I get really scared" at the notion of "starting a trade war in the middle of a deep recession," he says while reflecting on what happened in 1930 with the passage of Smoot-Hawley Tariff Act. Although the law was enacted to help protect American jobs and farmers from foreign competition, Frideman credits that trade legislation as a cause for making the depression a truly Great Depression.
The China Syndrome
In the accompanying interview Friedman also discusses what has become known at The China Syndrome by which journalists visit China and are essentially wowed by its fast-paced growth, most notably in infrastructure and technology. Some would classify Friedman as falling ill to this delusion having written about China's great advancements over the years.
Yahoo! Finance economics editor Daniel Gross, who does not deny having the syndrome somewhat himself, questions Friedman about whether too much credit has been given to the Chinese and too soon by envious onlookers.
Friedman's response: "I'm deliberately exaggerating for a reason…. What I am trying to do is light a fire under a complacent [U.S.] basically that thinks it is ok to have the Newark railway station, or the Grand Central Station or Penn Station in New York where the escalators look like they were invented before suitcases."
Watch the interview for more on why Friedman thinks this country is selling itself short.