The United States depends on China to finance a big portion of our federal budget deficit as well as our insatiable desire to buy everything under the sun on credit.
So it's a strange time to start a trade war with China. But some Senate Democrats seem to want to. They're pushing a proposal to raise tariffs on Chinese imports by over 27 percent unless China stops linking its currency to the dollar.
And it's not just Democrats who are playing the China card. Several Senate Republicans have signed on to the tariff bill. And the White House is encouraging this nonsense by insisting that China is "manipulating" and "undervaluing" its currency.
Obviously, there's cause for concern. America's trade imbalance with China accounts for about a quarter of our ballooning global trade imbalance. But the reason we have a large trade imbalance with China is not because China has been keeping its currency low. It's mainly because we in America are living way beyond our means, and we need to borrow like mad.
China is our second biggest lender, after Japan. Naturally, as China lends us money, it accumulates hundreds of billions of dollars in IOUs. As a result, the dollar stays high relative to China's own currency.
Yes, of course, China likes it this way. With a relatively low-valued currency, Chinese products are cheaper on world markets than they'd otherwise be. So China can export more. With more exports, the tens of millions of peasants pouring into Chinese cities from the countryside can find employment in Chinese factories. Stabilizing its cities this way is just plain smart.
And with a currency that's pegged to the dollar rather than being allowed to float, China can avoid surges of hot money from worldwide speculators who'd otherwise bet on when its currency would rise and by how much. Stabilizing its capital market this way is also smart.
Stabilizing cities and stabilizing capital markets are rational policies for any developing economy -- especially one that's developing as fast as China.
So let's be sensible. We need China's savings. We have an endless appetite for China's manufactured goods. And we want China to be a peaceful ally. Why put China in the impossible position of either letting its currency float and face all sorts of instabilities, or running smack into an American tariff blockade higher than its own Great Wall? Why start a trade war?
If we want an orderly way to correct America's huge trade imbalance, the first step is to get our own fiscal house in order.
Robert B. Reich is co-founder of The American Prospect. A version of this column appeared on Marketplace.
