As the global economy tosses in dire straits, the US Senate is tacking into even more troubled waters.
If no good can be expected from Europe, if Japan is still working its way out of recession and if Latin America is confronting new storms, the US and China, holding together two-thirds of the world's GDP, could be once again entrusted as skippers.
The US Senate, however, is at the brink of abandoning ship.
Some Senators complain about the Chinese yuan as artificially under-valued and demand its appreciation. If not, they want the US to impose more or higher import duties, tariffs and levies on Chinese goods.
Even if they were right concerning the exchange rate of the currency, they are wrong in the economic consequences of such a regulation. It would backfire and take its toll primarily on the US. There are three explanations for this.
First and from a macroeconomics' perspective, the right honorable Senators seem not to grasp the concept of globalization.
Raising custom duties for Chinese products does not automatically lead to more manufacturing in America. The goods would only be purchased from other countries with equally (artificially) low currencies.
More important, almost half of the US imports from China are components along the US-managed supply chain. If these imports become more expensive, American companies would have to raise their prices too, diminishing their competitive edge. This means closing factories and more jobless people.
Second and from a microeconomic perspective, the learned members of the Senate seem not to grasp the concept of entrepreneurship.
Imposing higher trade barriers would turn America into a "reserve for old-technology." China, in order to fill the resulting gap in finance and know-how, would focus even more on internal development. Innovation, newer technology and a better allocation of capital would result. In the middle-term, China would have the entrepreneurial advantage over the locked-in US. And there is one lesson to be learned: innovation is king.
Third and from a procedural view, the intended regulation is bound to take some time until it is put in motion.
According to the rules, first, the US administration would have to report the artificiality of the exchange rate. The next such report is due in March 2012.
Then, the US would have to offer China again a six-month deadline. After that, the trade barriers can be erected if the WTO is consulted.
It would take almost two years to implement the program. In two years, China has more than time to retaliate even before the Senate's plan is put in motion. Perhaps it is time for someone to remind the US Senators that there is only one way to sail through the dire straits of global economy: it's trust and trade.
The solution to US and global problems is to engage more in exchange with China and to worry less about politics.