Adam Smith, the founding father of laissez-faire economics, once said, “Man is an animal that makes bargains; no other animal does this – no dog exchanges bones with another.” Smith may have a point about humanity’s innate entrepreneurial spirit, but politics can and have trumped sound economic policy. Even humans have a bone to pick now and then.

Most recently, the Bush administration has reignited a two-year smoldering currency dispute with China into an outright trade war. Last Tuesday, the Treasury Department issued an ultimatum to China to revalue the yuan at a higher level. As of now, Treasury believes “distortionary” currency activities provide China with an unfair trade advantage. If China revalues the yuan at a higher level, then U.S. exports will be cheaper and more competitive (read as “fair”).

China has six months to revalue its currency before the United States labels it an outright currency manipulator. Although Treasury did not accuse China of outright “currency manipulation,” the allegation is clear enough. The United States is using the entirety of its soft power to make China acquiesce. As Secretary of Treasury John Snow stated in dire terminology, “Addressing imbalances in the global economy is a shared responsibility among the major economic regions of the world.” (Hint: China, the ball is in your court)

Yet, for all this talk of “shared responsibility” and tendentious moral twaddle, the Bush administration is merely catering to the usual protectionists: the lagging manufacture and textile industries. In fact, prior to Tuesday’s Treasury report, the United States had approved a bill to increase tariffs on Chinese textiles; and Bill Frist has promised a vote in July on New York Senator Charles Schumer’s tariff bill on Chinese textiles.

Despite claiming to have firm “principles” and “values,” President Bush, then, has proven most fickle on free trade. During the buildup to Election 2004, the President – under the counsel of Karl Rove (the Architect) – imposed tariffs on European steel in order to gain votes in the key swing-state of Pennsylvania. Although Bush eventually repealed the tariffs when the EU retaliated against the U.S. orange industry (a.k.a. Florida), Bush has intimated his willingness to undercut long-term U.S. trade strategy for short-term political gain.

The president has failed to acknowledge - let alone recognize - a simple economic and political truth: tradeoffs. For starters, the oft-cited U.S. trade deficit with China only provides one side of the picture. Yes, the United States is importing more than it is exporting to China. The termination of the MFA (a quota system on textile exports) has resulted in the rapid consolidation and expansion of China’s textile industry; this, of course, means a bigger kick in the pants for the U.S. textile industry. At the same time, because the yuan is pegged to the dollar, the Chinese have invested heavily in U.S. treasuries to maintain its peg. The influx of Chinese capital into the United States has allowed for the financing of the booming housing market and business investment spending. Although the Chinese may have an artificial “trade advantage,” this very advantage eases the financing of the U.S. budget deficit. Pushing China to revalue the yuan, then, may not be in the best of U.S. economic interests.

Furthermore, until now, the Bush administration has done a skillful job of being tough with China on issues of foreign policy, such as Taiwan, and accommodatingly assertive with regard to trade. By increasing pressure on China about the yuan in such a public fashion, the United States risks the disruption of the delicate division between economic and political goals. China may prove to be recalcitrant on the North Korea conundrum unless the United States backs down on its economic demands. As of now, China has never exerted its economic leverage (funding of U.S. debt) on the United States; discovering the extent of this leverage is not a luxury the United States can afford.

Other than directly affecting Sino-U.S. relations, the Bush administration may jeopardize the very goal of furthering global trade liberalization itself. After the release of the Treasury report, China, in an apparent move to appease both the United States and the EU, has agreed to raise its export tariffs by 400%. Bush believes he can swap trade restrictions on China for the textile industry’s support for his Central American Free Trade Agreement (DR-CAFTA). As of right now, DR-CAFTA – the top priority on Bush’s trade agenda - sits in a precarious balance. Despite urgings by United States Trade Representative Robert Portman ‘78 to pass the trade bill, many in Congress remain hesitant and union support is non-existent at best. Catering to the protectionist right and left in such a public fashion with concessions on China can only mobilize these groups to demand more and more – compromising the ultimate goal of free and open societies.

Essentially, Treasury’s report on the yuan is a move designed to cater to domestic interests. Yet, satisfying domestic constituencies is a dangerous exercise in political myopia. By pushing China on the yuan, Bush is merely undermining long-term U.S. trade liberalization and national security.