Edging towards a US-China trade war

Pascal Lamy, the head of the World Trade Organisation, is fond of saying that the predicted surge of protectionism in the wake of the Great Recession never happened. I hope he didn’t speak too soon. Things are getting pretty tense in US-Chinese trade relations. If they get seriously out of hand, the WTO will be handed a massive political problem that will threaten the very future of the organisation.

Yesterday, the US Congress passed legislation that would punish China for undervaluing its currency. The Senate is now talking of passing its own bill in the lame-duck session between the mid-term elections in November and the seating of new members in January. That would fireproof the law against any change in power in Congress – although some of the most anti-Chinese comments yesterday were, in any case, from Republicans, not Democrats.

If Congress passes protectionist legislation, then President Obama will have an enormous political headache. Does he exercise a rare veto against a popular bipartisan measure; or does he sign the bill and risk unleashing a trade war with massive political implications?

Obama would not be the only one with a headache. The Chinese would be certain to refer the legislation to the WTO; but the Americans will have done their best to make it WTO compliant. The legal status of “currency manipulation” is deeply murky. And the WTO will be in the middle of the 21st century variant of a superpower stand-off. Best of luck, Pascal.