China will retaliate if US imposes sanctions

"Last week, we heard Europe was to blame for US economic woes. The President said that “some of the challenges that we've had over the last several months actually have to do with the fact that in Europe we haven't seen them deal with their banking system and their financial system as effectively as they needed to.” This is undoubtedly true. Nevertheless, the implication was that US problems were made in Europe instead of the US.

This week, we are to hear that China is to blame for US economic woes. Congress will meet to take up legislation to threaten sanctions against China for currency manipulation. The Chinese currency is artificially low, making the US situation that much harder. Paul Krugman gives voice to the anxiety:

Respectable opinion is aghast. But respectable opinion has been consistently wrong lately, and the currency issue is no exception.

Ask yourself: Why is it so hard to restore full employment? ... The answer is that we used to run much smaller trade deficits. A return to economic health would look much more achievable if we weren’t spending $500 billion more each year on imported goods and services than foreigners spent on our exports.
-Holding China to Account, by Paul Krugman, Commentary, NY Times:

While it is true that China’s currency creates a bilateral deficit with the US, the US does have a multilateral deficit. Stephen Roach wrote last year correctly that:

Unless the problems that have given rise to the multilateral trade deficit are addressed, bilateral intervention would simply shift the Chinese portion of America’s international imbalance to someone else. That “someone” would most likely be a higher-cost producer – in effect, squeezing the purchasing power of hard-pressed US consumers.

He says GD II awaits if China bashing rhetoric turns into protectionism..."

at http://www.creditwritedowns.com/2011/10/china-will-retaliate-if-us-imposes-sanctions.html