Senators Blindly Promising to "Get Tough" on China's Currency

The US Senate is poised to take up the issue of China's currency policies, and nothing - certainly not some measly little facts that totally undermine the issue's relevance - is going to slow the legislation down.  You see, in today's Senate - one that hasn't passed a budget in almost 900 days - politics trumps reality.  Every single time.

Last Thursday, a bi-partisan group of Senators, led by Sens. Chuck Schumer (D-NY) and Sherrod Brown (D-OH) announced their much-anticipated legislation targeting China's currency policies:

Senators Charles Schumer of New York and Sherrod Brown of Ohio, both Democrats, urged support for legislation pushing China to raise the value of its currency as a way to stem U.S. job losses.

China’s currency policies cost more than 2.8 million U.S. jobs since 2001, the lawmakers said today at a Washington news conference. The legislation would let U.S. companies seek duties on imports from China to compensate for the effect of a weak yuan, which lawmakers said gives Chinese companies an unfair advantage against U.S. manufacturers.

“They get away with economic murder,” Schumer told reporters. “We are fed up; we are not going to take it anymore.” 

Schumer proposed similar measures in each of the past six years. None has received a Senate vote. The bill also is supported by Democratic Senators Robert Casey of Pennsylvania and Debbie Stabenow of Michigan, and Republicans Lindsey Graham of South Carolina, Richard Burr of North Carolina and Jeff Sessions of Alabama.

So to recap the Senators' argument: China's undervalued currency has eliminated 2.8 million US jobs, and these brave Senators want to empower US companies to seek new tariffs on Chinese imports in order to force China's hand.  Sounds almost plausible, but there's one big problem: every single "fact" in that previous sentence is dubious.

At best.

First, the employment study that the Senators cited - by the union-run and union-funded Economic Policy Institute - is total economic bunk.  I've already been over this fact several times, citing to myriad economists who have explained that EPI's methodology, which simply ties the US trade deficit to American job losses, is utter poppycock.  Cato's Dan Ikenson elaborated on this little fact last week, showing how EPI's so-called "findings" fly in the face of both economic theory and reality:

As the chart below (which is based on easily verifiable figures published in the Economic Report of the President) reveals, the trade deficit and job creation appear to be positively correlated. When the deficit rises, employment increases; when the deficit shrinks, employment declines. So, right off the bat, a central premise of [EPI's Robert] Scott’s analysis is in doubt.... 

Last month, the U.S. International Trade Commission published its seventh update to the “The Economic Effects of Significant U.S. Import Restraints” study, which contains a special section on global supply chains. On page xv of the executive summary is a table that not only raises more serious doubts about EPI’s methodology, but should put to rest once and for all the hyperbole employed and anxiety caused by alarmist public relations campaigns and the politicians they serve.

Table ES.4 of that study indicates that there is more U.S. valued added (U.S. labor, material, and overhead) in U.S. imports than there is Chinese valued added in U.S. imports. Specifically, 8.3 percent of the value of U.S. imports (about $160 billion last year) is U.S. value, while 7.7 percent of the value of U.S. imports is Chinese value added. EPI’s methodology does not account for the U.S. jobs associated with the U.S. value added in U.S. imports.

Furthermore, that same table reveals that U.S. value added accounts for 89 percent of total U.S. consumption (a figure that confirms the findings in a recent San Francisco Federal Reserve study), which means that foreign value-added accounts for just 11 percent of U.S. consumption, making the United States a fairly closed economy—or at least, a relatively non-integrated economy. And China? Well, China only accounts for a measly 0.9 percent of the goods and services consumed in the United States. So, if 2.8 million U.S. jobs were lost to a country that produces less than one percent of what Americans consume, I say its about time we shed those highly inefficient jobs that have been a drag on the U.S. economy. The fact is, however, that 2.8 million is a fiction....

Yes, the 2.8 million job loss figure is a fiction, concocted to support political talking points and a narrow agenda that distract the public from the real problems that ail our economy. Some Chinese government policies are genuine causes for concern, worthy of efforts to resolve, but we limit our capacity to address the real problems effectively when every last gripe becomes a call to arms.

In short, the EPI study is totally worthless for anything other than shameless political demagoguery.  Fortunately for EPI, that just happens to be a certain New York Senator's specialty!  Unfortunately for the rest of us, most reporters hired to cover that Senator's currency shenanigans don't do their homework and instead treat the "study" cited by Schumer (and others) as gospel.

Shame on them.

The second problem with the Senator's argument is that most US companies aren't begging for relief from China's currency policies.  Indeed, a lot of them are literally begging the Senate to back off the currency issue and focus on other, real bilateral trade issues.  For example, just last week over 50 trade associations, representing hundreds (if not more) US companies, sent a letter to Senate leaders asking them to drop the tough currency talk.  The full letter is available online and definitely worth reading, but here are some key excerpts:

We agree with many in Congress and the Administration that China needs a yuan exchange rate that responds to trade flows and that China should move steadily towards a market-determined exchange rate.

However, unilateral legislation on this issue would be counterproductive not only to the goals related to China’s exchange rate that we all share, but also to our nation’s broader objectives of addressing the many and growing challenges that we face in China.

Legislation that would increase tariffs on imports from China is unlikely to create any incentive for China to move expeditiously to modify its exchange policies. Rather, it would likely have the opposite effect and result in retaliation against U.S. exports into China – currently the fastest-growing market for U.S. exports.

We urge you to oppose currency legislation and instead work with and vigorously call on the Administration to develop a robust bilateral and multilateral approach to achieve tangible results, not only on China’s exchange-rate policies, but also on other Chinese policies that are harming American economic interests.

The business group letter also highlights the third problem with Schumer's plan: unilateral US action (i.e., tariffs) against China are unlikely to convince the Chinese government to do anything except resist further Yuan appreciation and retaliate against US exports and companies.  As I said earlier this month about Mitt Romney's misguided plan to aggressively target China's currency via Executive Order:

The idea that the Chinese government would just roll over and concede "defeat" in the face of President Trump[Romney]'s big, macho tariff is absurd.  First, Trump[Romney] fails to grasp that the Chinese government would never, ever do anything that makes it appear weak in the face of American aggression.  Instead, retaliation, not concession, is the far more likely reaction (just as China did when President Obama imposed those tire tariffs), and such sinophobic chest-thumping would likely retard, not quicken, the gradual appreciation of the yuan that China needs to undertake.  Second, China's not nearly as dependent on the US market as Trump[Romney] seems to think.  The EU is now China's biggest export market, and Chinese exports to the US represent under 30% of China's exports to its top 10 export destinations.  So while the US market is big and important, China has other options.  Third, China couldn't rapidly and dramatically appreciate its currency even if it wanted to because any such move would implode the Chinese - and by extension, global - economy.

So the tariffs probably won't change China's behavior, and they definitely will harm US companies and consumers.  Thanks for nothing, Senators.

Finally, it's far from clear that the Yuan remains significantly undervalued against the US dollar.  I've already discussed this inconvenient truth repeatedly, and news last Friday about a massive selloff of Yuan further undermines the conventional wisdom regarding China's currency:

A rush for safe investment havens led to an unexpected drop in the value of the Chinese yuan traded outside the mainland, as global investors eschewed a bet on a currency widely seen as undervalued for the comfort of the U.S. dollar and the Japanese yen. The move will have little effect on yuan as a whole because Beijing still tightly controls the currency. But it offers an example of the uncertainties China could face as it moves in fits and starts to loosen its restrictions on the yuan and give it a more central global role.

The drop took place mostly in Hong Kong, a Chinese city that operates under its own set of laws and the only place where the yuan can be traded outside the Chinese mainland. Chinese officials over the past year have transformed the city into a laboratory for yuan liberalization, allowing everything from the issuance of yuan-denominated bonds to yuan-trade settlement to yuan accounts for individual investors.

Until this week, the Hong Kong-traded yuan had remained broadly in line with the official yuan trading range. But market turmoil Thursday and Friday prompted the Hong Kong price to slump at one point to a discount of as much as 2.5% to the mainland yuan, the biggest gap since China began relaxing its currency restrictions about a year ago. The yuan on the mainland trades in a tight band because of Beijing's restrictions on its currency.

The discrepancy between Hong Kong-traded yuan and mainland yuan, known as of offshore market and the onshore market, respectively, later narrowed somewhat but remained high by historical standards, and late Friday traded at 6.49 yuan to the dollar in Hong Kong, compared with 6.39 yuan in the mainland. The moves fly in the face of currency-market conventional wisdom, which holds that the yuan is set to rise against the U.S. dollar as China soaks up capital and trade flows.

The selling pressure overwhelmed a facility set up by China to sell yuan at the mainland rate, which on Friday was offering investors more dollars for their yuan. Late in the day, Bank of China Ltd.'s Hong Kong arm, the designated clearing bank for the Hong Kong market, said it would temporarily stop buying yuan used for trade settlement as its quarterly quota for such transactions was full....

Market turmoil also roiled the market for yuan nondeliverable forwards, which are offshore derivatives that track the value of the yuan but can't be exchanged for the currency. The dollar one-year forward on Friday was bid as high as 6.47 yuan against the domestic spot rate of 6.39 yuan, implying expectations of a 1.3% yuan fall over the coming months.

Until now, global investors have largely adopted a strategy of shorting the dollar for the yuan on expectations that Beijing would continue to allow its currency to rise. In fact, desire for yuan offshore has caused the Chinese currency traded in Hong Kong to boast a premium over its mainland counterpart at most times.

Now, worries of an economic recession around the globe and a Greek debt default are driving investors back into the relatively safety of the U.S. dollar, leading many investors to sell yuan and other currencies for dollars.

For those of you (like me) who aren't currency experts, investors don't typically flee an "undervalued" Yuan for an "overvalued" Dollar.

So to summarize: the Senators are using a debunked economic study to justify their targeting a problem that might not even exist with a strategy that will never work on behalf of a constituency that doesn't want their help.

But other than that....

It's Baaaaaack....

After a glorious two-month oasis of silence on China currency, the issue is back with a vengeance.  (I swear, this thing is harder to kill than the Terminator.)  Yesterday, everybody's favorite China-demagogue Sen. Chuck Schumer (D-Campaigning) announced to the US-China Economic and Security Review Commission that he and his Senate colleagues would advance legislation unilaterally attacking Chinese imports unless China appreciates its currency (the RMB) by the end of the June 26-27 G-20 Summit in Toronto.  Reuters details the comments here:

U.S. congressional anger over China's currency and trade practices boiled over on Wednesday as senators vowed to pass legislation soon and lashed out at President Barack Obama's administration for failing to get tough with Beijing.

"Years of meetings and discussions with Chinese officials in an effort to persuade China to float its currency have repeatedly failed to produce lasting and meaningful results," Senator Charles Schumer told the U.S.-China Economic and Security Review Commission, a watchdog group appointed by Congress.

"No question, this is what is called a 'put up or shut up' moment for lawmakers," the New York Democrat said.

Schumer told the commission that he and other colleagues would push for a vote "in the next two weeks" on legislation that would allow the Commerce Department to use anti-dumping and countervailing duty laws against China or any other country with a fundamentally misaligned exchange rate.

He blamed China's undervalued currency for millions of lost U.S. manufacturing jobs and thousands of closed facilities.

Getting Beijing to allow its currency to rise to a more market-oriented exchange rate would do more to create jobs in the United States than any new stimulus package, Schumer said....

Schumer and [fellow protectionist Sen. Lindsay] Graham are expected to offer their bill as an amendment to a broader piece of legislation, rather than try to pass it on its own.

For the bill to be enacted, it would also have to be approved by the House of Representatives and signed into law by Obama.

Schumer and many of his Senate colleagues - from both political parties - echoed such angry sentiments at today's Senate Finance committee hearing with Treasury Secretary Tim Geithner.  (More on that here, along with some fantastic commentary from some trade lawyer wearing way too much makeup.)  Oh, goody.

Now, I've already laid out in excruciating detail how silly and wrongheaded all of this hyper-political pabulum is from an economic, historical, legal and practical perspective, and the Senators' rhetoric remains par for the course.  Heck, I even predicted last month that those precious weeks of silence on the China currency "debate" would end right about now as these pols resumed their China attacks in preparation for the November midterm elections.  However, a few things have changed since the last time China currency was in the news (i.e., March-April of this year) which make this week's silly rhetorical flurries a little more noteworthy.

First, Greece imploded and took the Euro with it.  Back in April, pretty much everyone "in-the-know" (or at least who unwisely thinks he's i-t-k - like me) was expecting China to allow a one-off RMB appreciation of about 5% sometime right before the G-20 Summit.  Indeed, the DC tea leaves were saying that the G-20 "deadline" was the main reason that the Treasury Department delayed its semi-annual currency report.  But then the Euro collapsed and made everything a lot more complicated.  The EU, afterall, is China's top trading partner, and China is the EU's #2.  So with the Euro falling to levels not seen in years, and with the global currency markets ridiculously unstable right now because of it, the Chinese government is probably going to hold off on any RMB movement until things settle down a bit.  And you really can't blame them.

Second, China announced yesterday that its exports in May surged 48.5% year-on-year, and its trade surplus returned to pre-recession levels (a rather large $20 billion/month).  Imports into China rose by 48.3% too, but let's face it: nobody really cares about that because May's surplus statistics are definitely going to stall (or thwart entirely) any of those budding conclusions that China's tiny April surplus and March deficit signaled that the Chinese economy was finally becoming more consumption-oriented.  Now, given the EU mess, nobody really knows what's going on with China or anywhere else for that matter, but there's no doubt that China's May trade data are going to fuel the congressional currency hawks' fire.  As Patrick Chovanec eloquently put it: "by knocking the legs out from under Chinese arguments that a structural adjustment is taking place without Renminbi appreciation, China’s May export surge is likely to feed into growing US impatience over China’s hesitation in moving on the exchange rate."  Indeed.

Third, the US announced today that is April trade deficit increased 0.6% to $40.29 billion from a revised $40.05 billion in March.  From a purely economic perspective, these new data are pretty bad news: both exports and (non-oil) imports fell - a sign that US economic recovery just isn't ramping up.  But the stats are also unwelcome from a political perspective two reasons: (i) the currency hawks can scream "DEFICIT!" and most people (including a lot of bad journalists) aren't going to know that the US trade deficit's growth was driven entirely by higher energy prices; and (ii) the US trade deficit with China - which is an economically worthless, yet politically effective number - expanded significantly to $19.31 billion in April from $16.90 billion in March.  Yet another thing to point and scream about.

The combination of these three developments, a struggling US economy, and the November midterm elections is definitely going to push China's currency back to the forefront of the 2010 international trade stage and maybe, just maybe, create the perfect political storm to blow some piece of nasty currency legislation across the House or Senate finish line.  Now, I still don't expect any such legislation to ever pass both chambers and make it all the way to President Obama's desk, but I do think that we all should gird our loins for one hot, sticky (and terribly annoying) "Summer of Schumer."

Ugh.

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?