Potential US trade protection and possible Chinese responses

Brad Setser has a post on "Bretton Woods Two and Trade Politics". His main point:

[I]t is not surprising that the unprecedented US savings deficit and Chinese consumption deficit (and resulting US current account deficit that is now heading towards 7% of GDP and Chinese current account surplus that looks likely to exceed 7% of China's 2005 GDP) is putting real strains on the trading system. Deficits and surpluses of this scale in major parts of the world economy challenge the norms of the post-war system -- and challenge domestic political compromises that enabled post-war trade liberalization. Even if deficits and surpluses of this size are economically sustainable, they may not be politically sustainable.

Politically sustainable or not, Andy Xie thinks that the sky isn't falling on globalisation, so China should not accomodate US protectionist pressure.

[I]f the purpose of US pressure on China is just to damage China, it is pointless for China to compromise. China is better off to wait for a protectionist bill, such as a 27.5% tariff, which may affect only the one-fifth of China's exports to the US that belong Chinese companies, or 5-6% of China's total exports. The US and other foreign companies own four-fifths of China's exports to the US and must pay the tariffs. This would be better than a big revaluation that would affect all of China's exports and may destabilize the economy.

Xie, of course, is assuming that a revaluation is not in China's interests, an assumption not everyone would agree with.

The Northern Trust Company's Paul Kasriel and Asha Bangalore for one -- or two -- assert that anchoring the renminbi to the US dollar is a recipe for Chinese inflation. They suggest instead that the Chinese anchor their currency to gold as "a recipe for long-run price stability. And long-run price stability may be an important ingredient in the recipe for social stability, something the Chinese leadership is striving to preserve."