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TDS Co-Editor William Galston: How Congress's Showdown With China Puts Obama in a Serious Bind

This item by TDS Co-Editor William Galston is cross-posted from The New Republic.

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.