How Congress’s Showdown With China Puts Obama in a Serious Bind

While all of Washington
fastened its gaze on Chris Christie, the most important issue of the
week—maybe of the year—was playing out on the floor of the Senate. By a
margin of 79 to 19, senators agreed to consider a measure that would
allow the United States to impose tariffs on another country if the Treasury found its currency to be “misaligned.” As the Wall Street Journal points out,
this is a less demanding standard than current law, which “requires a
finding of intentional manipulation.” If this newfound bipartisan comity
in Congress over the issue of confronting China culminates in a bill
that passes both houses, it will put Obama in a serious bind: either
adopt a similarly hawkish stance and risk a trade war, or issue a veto
that would expose him to attack from the Republican nominee and provoke a
populist backlash from workers and communities throughout America’s
hard-pressed manufacturing sector.

The huge bipartisan majority on the procedural question this week
virtually guarantees that the bill will make it through the Senate, and
it illuminates the changing contours of the China
trade issue. Nearly every Democrat voted to proceed; Washington’s Maria
Cantwell and Patty Murray and (intriguingly) Claire McCaskill of Missouri
were the only dissidents. And fully 31 of the 47 Senate Republicans
supported the motion as well, including Minority Leader Mitch McConnell,
Conference Chairman Lamar Alexander, Policy Committee Chairman John
Thune, and John Cornyn, who heads the committee responsible for electing
more Republicans to the Senate in 2012. Among the party’s leadership,
John Kyl stood alone in opposition.

This Republican split should have come as no
surprise. Last year, just a month before the midterm elections, a
similar bill won the support of 99 Republicans, with only 74 opposed. If
anything, the balance inside the new House Republican majority has
shifted even further toward confronting the Chinese: Compared to
traditional business-oriented conservatives, Tea Party populist
conservatives are significantly more hawkish on Sino-U.S. trade
relations. In a nomination contest in which Tea Party sympathizers will
enjoy disproportionate influence, it is not hard to understand why even a
quintessential business candidate like Mitt Romney has chosen to embrace a hard line on Chinese currency and trade practices.

Republicans are hardly out of step with the country, either. In a Pew survey conducted earlier this year, 54 percent of Republicans and Republican-leaning independents said that it was very important to get tougher with China
on economic and trade issues; so did 52 percent of Democrats and their
independent leaners. Among Republican identifiers and leaners, 60
percent of Tea Party sympathizers agreed, compared with only 49 percent
of non-Tea Party sympathizers. 

This is not to say that Americans see China
as an adversary, a position endorsed by barely one-fifth of the
population. And nearly three in five Americans believe that it is very
important for the United States to build a stronger relationship with the People’s Republic. The question is whether we can have it both ways.

It’s easy for business-oriented leaders and
publications to dismiss these sentiments as raw politics. But there’s
more to them. In a recent NBER paper, “The China Syndrome,”
economists David Autor, David Dorn, and Gordon Hanson, who cannot be
accused of shilling for anyone, examine the effects of Chinese import
competition on the U.S. economy. Their conclusion: The more exposed a
local labor market is to that competition, the larger its negative
effects. They summarize matters this way:

Rising exposure increases
unemployment, lowers labor force participation, and reduces wages in
local labor markets. Conservatively, it explains one-quarter of the
contemporaneous aggregate decline in U.S.
manufacturing employment. Transfer benefits payments for unemployment,
disability, retirement, and healthcare also rise sharply in exposed
labor markets. The deadweight loss of financing these transfers is one
to two-thirds as large as U.S. gains from trade with China.

I hope that other economists will examine and
assess these findings, which seem solidly grounded. If Autor, Dorn, and
Hanson are right, the United States has a problem that goes well beyond the vagaries of populist politics.

And speaking of politics, what about the House and
the White House? John Boehner characterizes the Senate’s action as
“dangerous” and believes that forcing another country to revalue its
currency goes “well beyond what the Congress ought to be doing.” If he
has his way, the bill will never come to the House floor. But it’s not
clear that he will, because he probably doesn’t speak for a majority of
his own party, let alone of the House. If a bipartisan coalition feels
strongly about the matter, it can probably get enough signatures on a
discharge petition to override the Speaker’s wishes.

As for the president, he has declined to take a
position on the matter. Trapped between the imperatives of global
diplomacy and pressure from the Democratic base, no doubt he is hoping
that the Republican leadership can keep the bill bottled up
indefinitely. If not, he’ll have to declare himself. And if legislation
reaches his desk, he’ll be forced to make what could turn out to be a
fateful choice: Sign the bill and risk a trade war, or veto it and face
an onslaught from Mitt Romney throughout the Midwest.
No wonder many Democrats are urging him to get engaged and negotiate
with the Hill before he is faced with only these unpalatable options.

In a lead editorial, the Wall Street Journal argues that “a major benefit of free trade is its stabilizing effect on rising powers like China.”
There’s something to this, as the history of the 1930s suggests. But
American workers are entitled to ask why they are always the ones paying
the price for our global diplomacy. If the U.S.
business community wants to sustain an open global trade regime, it
should start investing in job-creating enterprises here at home. And if
the Obama administration wants to maintain a good working relationship
with the world’s second-largest economy, it should use the leverage
created by the pending currency legislation to wring significant
economic concessions from China’s
leaders. The alternative is a trade war that will benefit no one, and
the collapse of the modest cooperation that now exists on issues such as
North Korea and Iran. The clock is ticking, and the stakes couldn’t be higher.