Washington Considers China Trade War

It's not that anything new has been revealed about China's practices, but rather that something new has emerged about the nature of Washington's opposition to it. Last week, the Senate passed a bill that would force U.S. retaliation against China's currency manipulations. The bill passed with 63 votes -- including 16 Republican votes.

There is nothing new about most Democrats supporting what some might consider "protectionist" legislation. But 16 Republican Senate votes are new and revealing. There was no ideological or regional pattern to them. They included Ohio's Rob Portman, a solid senior member of the Republican free-trade establishment who served as President George W. Bush's trade representative and director of the Office of Management and Budget; Maine's liberals Olympia Snowe and Susan Collins; conservative southerners such as Jeff Sessions and Lindsey Graham; and the Rocky Mountain's conservative Mike Crapo.

Also, last week Mitt Romney -- the very model of a Republican financial man and free trader -- wrote in a conspicuous Washington Post article: "If I am ... elected president, I will work to fundamentally alter our economic relationship with China." It got tougher after that. While he firmly defended free trade, he made the argument, "Actually doing something about China's cheating makes some people nervous. Not doing something makes me nervous. We are warned that we might precipitate a trade war. Really? China is selling us $273 billion per year more than America is selling China -- why would it possibly want a trade war?"

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Whether Romney is right or wrong about that, what is politically fascinating is that he is not afraid to talk about the threat of a trade war. Yes, he is running for president, so it could be just political. But he may well be the next president, so campaign rhetoric may become presidential policy. And given his deep support in the internationalist, GOP business community, he must have a sense that he is not outraging those supporters by his strong stand.

Equally revealing of the changing mood of the Washington-China trade policy was the Washington Post column last week by solid, centrist, free-trade supporting, highly regarded Robert Samuelson: "No one should relish threatening China with a 25 percent tariff. It would be illegal under existing WTO rules; to save the postwar trading system, we'd have to attack it. This would risk an all-out trade war just when the world economy is already tottering. ...The policy's only recommendation is that it might be slightly better than the alternative: condoning China's ongoing assault on our industry. ... There's already a trade war between them and us; but only one side is fighting."

It is startling to read the Washington Post's senior economics columnist willing to engage in a trade war with China as the world may be sinking into recession. It's not so much what is being said as who is saying it that makes one sense that Washington may be getting ready to reverse 75 years of post-World War II trade policy.

It is particularly striking when the opposition to the China currency bill have explicitly compared this moment to the 1930s, when a financial crisis lead to the Smoot-Hawley trade war, which led to a decade long world depression. Yet, these and other prominent free traders are embracing -- not running from -- the threat of trade war.

Of course, these are only the opening shots. The Wall Street Journal stands stoutly against such policies. Speaker of the House John Boehner came out against the Senate bill expressly because he worried it might start a trade war. If he permitted a vote, the House would pass the bill at veto-proof strength with upwards of a hundred Republican votes for the bill. President Obama has not yet revealed whether he would sign or veto such a bill if it got to his desk.

But the doubt about letting abstract free-trade principles deter an aggressive U.S. response -- even at the risk of a trade war -- has been building for years.

In a December 2007 column, I assessed the political fact back then that Hillary Clinton and Mike Huckabee were both questioning blind adherence to free trade. I wrote: "Classic free-traders may impute such words by both Hillary and Huckabee to cynicism, populism and demagogy, but it is just possible that the American people may sense a real danger that the elites, heavily invested in the globalization project, cannot see yet."

Now, four years on, some of those very elites are beginning to express the same doubts about the utility of relying on abstract free-trade principles, and they are willing to consider the risk of a trade war rather than endure more of the same trade imbalances.

Weak as our economy is now, our gross domestic product is still about three times the size of China's. If we have to push back against abuse of free trade principles, better now than five years from now when (if we continue current policies) we are not likely to be nearly as strong.

When the real-world fears and judgments of the Washington political and journalistic elites begin to line up with the same sentiments in the broader public, it may be the beginning of an historic trade policy shift.