China GDP Surges 11.9% In Q1, US Trade Issues Lurk

China’s first quarter GDP growth rate was a sizzling 11.9%. The improvement was the best in three years and shows that the economy in the People’s Republic has returned to pre-recession growth rates. The same cannot be said of the US, EU, UK, and Japan and that could cause more tension in the intense debate over the value of the yuan and its impact on international trade.

Bloomberg reports that “Consumer prices rose 2.4 percent in March from a year earlier.” Chinese growth has clearly not set off a substantial increase in inflation.

Because China is growing so much faster than the developed world, the issue for the US is one of why the American GDP is so weak compared to the world’s most populous nation. The answer, at least for some economists and politicians,  is that the Chinese manipulate their currency to allow them favorable price terms as they sell goods to the rest of the world. Over 100 members of Congress have already written the US Treasury to say that they will not tolerate huge trade imbalance with China. In the meantime, Treasury has put off a decision about labeling China as a currency manipulator. The decision was supposed to come on April 15. In the meantime, Tim Geithner has visited China in an attempt to get the Chinese to allows the value of the yuan to no longer be pegged to the dollar, a practice that allows the price of imports from the People’s Republic to stay low. President Obama recently met with China’s president Hu Jintao. At the meeting, the Chinese chief  made it clear that China will not be bullied into changing how it values the yuan.

China must now risk a trade war with the US or publicly give into pressure from the West on the yuan issue. Most economists and political experts believe that a trade war is unthinkable. But, that is not entirely true. China could believe that it can wait out the US which currently has low GDP growth and high unemployment. It could even use its 2 trillion in foreign currency reserve, much of it in dollars, to put financial pressure on the US.

But, in America it is an election year. Politicians trying to hold their seats and those trying to take them will find the Chinese trade issue and its possible effects on US unemployment a tempting issue.

Douglas A. McIntyre.