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Busch: This Threat to China is All Wrong

Today, the US House of Representatives is set to vote, and likely pass, a Chinese currency tariff bill (HR 2378).

Ostensibly, this bill is an attempt to force the Chinese to revalue their currency and thereby help save American jobs. While the goal of the bill is questionable, the reason for it's existence is not.

Prior to the mid-term elections, the US unemployment rate is the driving force in American politics. Given the tenuous position of the Democrats, they are attempting to show the electorate that they can not only create jobs, but also stand up to the Chinese. Republicans are enabling this legislation to get through to ensure they don't look weak to their constituents.

The good news is that this bill is unlikely to be passed in its current form by the Senate.

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The bad news is that the Senate is interested in passing a bill on trade (S 1254) by Chuck Schumer (D-N.Y.) and may do it soon.

The official title of the trade legislation is "A bill to provide identification of misaligned currency, require action to correct the misalignment, and for other purposes."

This bill was co-sponsored by Sen Sherrod Brown (D-Ohio) and Lindsey Graham (R-S.C.). According to Congressional Quarterly (CQ), Sen. Debbie Stabenow, D-Mich., a vocal critic of China’s currency practices, predicted that the Schumer bill will get substantial support. “It is bipartisan in the Senate,” she said. “I’m very hopeful that we will be able to take that up in the Senate in the lame duck.”

Recently, the Congressional Research Service wrote a report entitled, "China's Currency: An Analysis of the Economic Issues."The report stated, "Over the past several years, the Chinese government has maintained a policy of intervening in currency markets to limit or halt the appreciation of its currency, the renminbi (RMB) against other major currencies, especially the U.S. dollar. This policy appears to be largely intended to keep China’s export industries competitive internationally and to attract foreign direct investment (FDI), which have been major factors behind China’s rapid economic growth."

Not surprisingly, the support for these bills stem from both labor unions and small business who must compete with cheaper Chinese labor and low cost imports from China.

The best news is that both the White House, the US Treasury and the US Chamber of Commerce are against this Chinese trade legislation. However, President Herbert Hoover was also against the 1930 Smoot-Hawley Tariff bill, but eventually signed the legislation. The phrase "Desperate times calls for desperate measures" comes to mind now for not only the US unemployed, but perhaps for the soon to be unemployed politicians.

While I continue to believe the overall tone of policy out of DC is shifting towards supporting business and jobs, trade tariff legislation is never a good thing for an economy. It is this dynamic that may abruptly end the positive momentum begun in mid-August that has lead to a 9% US stock market rally in September.


Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.