Tuesday, March 16, 2010

Apparently, Logic Has No Place in the China Currency Debate

It must be a day ending in "Y," because everyone's favorite China sheriff, Sen. Chuck Schumer (D-Campaigning), and his sinophobic Barney Fife, Sen. Lindsay Graham (R-Textile Industry), are yelling about China's currency regime.  This time, they've joined forces with anti-trade crusader Sen. Sherrod Brown (D-USW) to introduce newmostly-recycled legislation (the "Currency Exchange Rate Oversight Reform Act of 2010" - bill number & text currently unavailable) that would, among other things, change US law in order to force the US Department of Commerce and US Treasury Department to aggressively fight China's monetary policy:
[The legislation would c]reate a new approach to identifying currency manipulators by requiring that the Treasury Department base its determination strictly on objective measures related to currency exchange rates. Under current law, Treasury also has to determine that the misalignment is a willful attempt to gain a trade advantage before it can cite the country. The new legislation would eliminate the need to show intent....

The legislation requires Treasury to develop a biannual report to Congress that identifies two categories of currencies: (1) a general category of “fundamentally misaligned currencies” based on observed objective criteria and (2) a select category of “fundamentally misaligned currencies for priority action” that reflects misaligned currencies caused by clear policy actions by the relevant government....

The legislation clarifies that the Commerce Department already has authority under U.S. law to investigate whether currency undervaluation by a government provides a “countervailable subsidy” and must do so if a U.S. industry requests investigation. In recent years, the Commerce Department has been reluctant to exercise its authority under the law. This legislation, therefore, seeks to strengthen and reaffirm existing law and the Commerce Department’s obligations under the law.

The legislation also makes it clear that the Commerce Department is required to investigate currency undervaluation as a “countervailable subsidy” if Treasury designates a “priority” currency and a U.S. industry requests an investigation....
Sigh. I've already spent too much time explaining how the current debate surrounding China's currency policies is just rife with misleading statements from those who, for often unseemly reasons, breathlessly yearn for the United States to "get tough" with China and to "force" the Chinese to "restore fairness" to the bilateral trading relationship.  I've explained how China's currency, the renminbi (RMB), might not actually be as undervalued as the currency hawks claim.  I've provided ample historical and economic evidence demonstrating that a significant RMB appreciation probably won't dramatically affect US-China tradeflows or the US manufacturing sector.  And I've even tried to show how guys like Chuck Schumer love to baselessly demagogue China (or before that, Japan) in election years (and gee, guess who's up for re-election this year?) as an easy way to get free media and literally scare up votes.  On this last point, I'll soon delve deeper into the political pandering/misinformation that Sens. Schumer, Graham and Brown have used to support their new anti-China legislation (as part of my "Protectionist Campaigning for Dummies" series).  So stay tuned for that.

For now, however, I just want to make two quick and easy points.  First, Cato's Dan Ikenson does a great job today summarizing the best economic arguments against doing anything on the China currency issue, especially when your express goal is to affect the US-China trade balance.  I've covered a lot of this before, but this is a really good synopsis, so here you go:
Between July 2005 and July 2008, the Chinese RMB appreciated by 21 percent against the dollar.  But over that 3-year period, the U.S. trade deficit with China increased from $202 to $268 billion.  Why, then, do policymakers think revaluation is the key to reducing the trade deficit?  Why do they even care about the bilateral trade deficit, which is meaningless in the context of our globalized economy.  Only one-third to one-half of U.S. imports from China is Chinese value added.  The rest is Japanese, Taiwanese, Korean, Australian, American and other countries’ value added.  The bilateral figures tell us nothing important.

During the aforementioned period of RMB appreciation, U.S. exports to China increased by $28 billion.  But U.S. imports from China increased by $94 billion.  Americans continued to purchase Chinese imports–despite the currency-induced price increase–for two primary reasons.  First, there aren’t many substitutes for the Chinese products U.S. consumers tend to purchase.  Second, Chinese exporters, by virtue of a stronger RMB, were able to reduce their costs of production because many of those costs are for imported inputs (made cheaper because of the stronger RMB), which subsequently enabled them to lower their prices for export to the United States.
Ikenson's upcoming paper on China should provide a lot of other good data and argument, so be on the lookout for that.

Second, I have just one simple question for all of those protectionists, like a certain New York Times columnist, who are currently demanding that (a) the Treasury Department label China a "currency manipulator" in its semi-annual report on the subject, and/or (b) the Commerce Department reverse years of practice and deem "currency manipulation" to be a countervailable export subsidy under US Trade Law:
If Chuck Schumer, Lindsay Graham and Sherrod Brown - the Senate's most aggressive China currency hawks - believe that they need to change US law in order for Treasury and Commerce to respectively find "manipulation" and "subsidization," then why on earth should anyone believe protectionists' confident assertions that China's actions are patently illegal under existing, un-amended US law?
Seriously, how does this make any sense?  In essence, Schumer and his cronies are saying, "Hey, Geithner and Locke, you better find China's policies illegal under current law, or else we'll change the law so that they're illegal."

What the $#%&*?

Then again, considering how steadfastly and routinely the China demagogues ignore all the, you know, actual facts about China, currency, manufacturing and the bilateral trade deficit, logic obviously has no place in this debate, now does it?

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