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Nobody disputes that almost three decades of U.S. trade (net saving) deficits have made the global system of finance and trade more accident prone. Outstanding dollar debts have become huge and threaten America’s own financial future. Insofar as the principal creditor countries in Asia (Japan in the 1980s and 1990s, China since 2000) are industrial countries relying heavily on exports of manufactures, the transfer of their surplus savings to the saving-deficient United States requires that they collectively run large trade surpluses in manufactures. The resulting large U.S. trade deficits have worsened the “natural” decline in the relative size of the U.S. manufacturing sector and eroded the U.S. industrial base.

One unfortunate consequence of this industrial decline has been an outbreak of protectionism in the United States, which is exacerbated by the conviction that foreigners have somehow been cheating with their exchange rate and other commercial policies. The most prominent of these have been associated with New York’s Senator Charles Schumer. In March 2005, he co-sponsored a bill to impose a 27.5 percent tariff on all U.S. imports from China until the renminbi was appreciated. His bill was withdrawn in October 2006, when shown to be obviously incompatible with U.S. obligations under the World Trade Organization. But Schumer threatens to craft a new China bill for 2010 that is WTO compatible.