In 2010 an undervalued renminbi was a significant drag on advanced economies, including the United States. Since then, however, two big things have happened: relatively high inflation in China, and some appreciation of the renminbi against the dollar. As a result, the real exchange rate of China against the United States (based on consumer prices), has appreciated significantly:I have no idea whether Mitt Romney's misguided stance on China's currency or the aforementioned facts really caused Krugman's views to change, but that's not important for tonight's purposes. Instead, I just want to
At the same time. China’s surplus has come way down:
So this is an odd time to be making confrontation over China’s currency a centerpiece of your economic policy — unless, of course, it’s just bluster aimed at making voters think you’re tough.
As you may recall, in 2010 grousing about China's currency was pretty much a monthly affair for Krugman's New York Times column. But he not only would rage about the dangerous "global imbalances" caused by Chna's currency, but also would demand that the United States adopt a severly protectionist stance in order to remedy the "problem":
In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.When Krugman made this proposal, I and a host of other (smarter) people took to the interwebs to explain just how ridiculously awful the idea of an across-the-board 25% "currency tariff" was from a historical, legal and economic perspective. We repeated those criticisms when he later expressed support for Senate legislation (which followed unfortunate passage of an almost-identical House bill) that would have directed the US Department of Commerce to treat currency undervaluation as a countervailable export subsidy, thereby opening the door to countervailing duties on Chinese - and other! - imports. We even went so far as to explain that, even assuming that Krugman and others were correct that China's currency was horribly manipulated and causing dangerous global imbalances, basic economics dictates that the whole thing would work itself out, and that harmful protectionist tariffs were most definitely NOT needed to solve the so-called "problem."
I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.
So here's my basic question for Dr. Krugman - a man who, by the way, used to be one of the pre-eminent advocates for free trade:
Aren't you just thrilled that Congress didn't take your advice and open the permanent, pandora's box of currency protectionism to address a "problem" that, as you now freely admit, has fixed itself in under 2 years?Seriously, just think of what would've happened if the Senate had bowed to Krugman's demands and passed the currency/CVD bill: we'd very likely have this messy new protectionist law on the books, leading to lord-only-knows-how-much litigation, economic harm and diplomatic tension between two of the world's biggest economies.
Instead, the only thing damaged is Dr. Krugman's free trade and economic reputation.
Boy, did we dodge a bullet!