Just so you don’t think that I spend all of my time seething at the GOP, let me assure you: I take offense to any stupidity in statecraft, be it from the right or left side of the aisle in Congress. I maintain that Congress really should just stay out of foreign policy as a whole, and this particular issue cuts right to that belief, I feel. The Democrats, seemingly seeking to look tough, are in actuality looking extremely stupid. I presage the rest of this post by saying that I am in no way an international finance expert, but, to be fair, neither is Congress.
If you were to turn on CSPAN 2 later tonight, as wonks are wont to do, you’d see that the Senate has taken up a bill known as the “Currency Exchange Rate Oversight Reform Act of 2011”. In late September, Sherrod Jackson (D-OH) introduced on the Senate floor a bill to punish ‘currency manipulators’ who suppress the value of their currency in order to flood the market with cheap goods, boosting their exports to the detriment of other countries. I wonder who they could be talking about. I. Wonder.
In this attempt to take on China and the yuan, I originally opted to let it go, as a bit of political posturing. Senator Charles Schumer (D-NY) has been the Democrat’s message man in the Senate for the last year and has been strongly backing the bill, which doesn’t surprise me, as he’s been backing the same sort of bill for the last six years. What makes this time different is that it might actually go somewhere. There was a bit of a scene made on the Senate floor the other night surrounding the bill, as GOP Senators sought to hang more amendments on after cloture had passed, resulting in a rules change that remains fascinating for parliamentarians and giant nerds but overall pointless in the grand scheme of things. These amendments were defeated, leaving room for the bill to move forward to a vote later tonight.
This whole thing intrigued me enough to actually read the text of the Bill, which, written in legalese, is not the most incendiary of documents right off the bat. The short of it is that following passage, the Secretary of the Treasury would be mandated to provide to Congress reports on which countries are unfairly manipulating their currency. Should a country having been found to be manipulating their currency fail to change their ways within 90 days, several actions may be taken, including:
(1) ADJUSTMENT UNDER ANTIDUMPING LAW- For purposes of an antidumping investigation under subtitle B of title VII of the Tariff Act of 1930 (19 U.S.C. 1673 et seq.), or a review under subtitle C of such Act (19 U.S.C. 1675 et seq.), the following shall apply:
(A) IN GENERAL- The administering authority shall ensure a fair comparison between the export price and the normal value by adjusting the price used to establish export price or constructed export price to reflect the fundamental misalignment of the currency of the exporting country.
(B) SALES SUBJECT TO ADJUSTMENT- The adjustment described in subparagraph (A) shall apply with respect to subject merchandise sold on or after the date that is 30 days after the date the currency of the exporting country is designated for priority action pursuant to section 4(a)(3).
My eyes originally glazed over this, before realizing that this was intended to be the bulk of the punishment; my eyes instead gravitated towards the provision that has US officials at international banks refuse loans to the country in question. Which in and of itself is pointless, as while China has received various loans for infrastructure projects from the World Bank, managed to lend more to developing countries in the 2009-2010 period than the Bretton Woods system. But I digress. In any case, I was unfamiliar with the Tariff Act of 1930, or so I thought, so I went to look it up. Turns out, most people know the Tariff Act of 1930 by a far different name: The Smoot-Hawley Act.
So let’s take a quick second to look at the Unfortunate Implications inherent so far. In the midst of an economic downturn that has shown signs of picking up again, Congress decides to go one step further, and impose tariffs to encourage people to buy local rather than importing goods. It worked so well in the past, why not bring about protectionism round two? This bill’s provisions have several flaws, which were summed up well in a Washington Post op-ed by Robert Samuelson:
Even if this becomes law — not certain — it wouldn’t work for two reasons. In 2010, our imports from China totaled $364 billion. (American exports to China were $86 billion, leaving a deficit of $278 billion.) To be effective, countervailing duties would need to apply to most Chinese imports, but in practice, companies bring cases only for individual products, affecting millions, not billions, of dollars. The process would be cumbersome and time-consuming.
Worse, China might protest any countervailing duties to the World Trade Organization, and it might win. WTO rules permit subsidies that are broad-based rather than those benefiting specific firms or industries, say lawyers. The undervalued RMB might pass muster. If so, China could then retaliate by imposing duties on U.S. exports to China.
Those duties would act in the same function as the counter-tariffs that states imposed on the United States following the passage of Smoot-Hawley. While the giant raise in unemployment that Smoot-Hawley preceded probably would not come to pass following enactment of this bill, it’s doubtful that the thousands of jobs proponents of the bill claim it will spur will actually come to pass. Samuelson goes on to say that what is needed is instead a stronger push-back against China to help prevent further unfair trade practices by Beijing in the future, when subsidized aircraft is the focus of trade disputes rather than textiles, which is where we differ. I will readily agree that China’s practices do more to harm the free-trade system than those of any other state, but I really don’t know that protectionist measures are the way to affect the sort of change that Mr. Samuelson and Senate Democrats are clamoring for.
Another nail in the coffin of this policy’s intellectual rigor is that the yuan has actually be strengthening against the dollar, as the below chart from the Economist shows, as the trade deficit has gone up. So even as the currencies have come closer to reflecting actual disparities of value, China continues to export far more to us than vice-versa. The actual value of the currency is still definitely under-appreciated, with one Wharton School graduate estimating in his thesis that is currently hovering around 35% undervaluation. A correction to a more accurate 4 yuan to the dollar may alter China’s overall economic outlook as exports decline and cheaper alternatives fill the market. However, I don’t think that such a correction, which this bill seeks, will manage to change much in the deficit that matters, the one between the United States and China.
Despite my reservations, it seems that the Senate isn’t listening to me. Given the ease with which the bill passed cloture, which requires sixty votes, the bill is certain to pass through the upper chamber of Congress. Even the normally uber-conservative Senator from Alabama, Jeff Sessions, has come out in favor of this bill. The future of this bill is in no way certain though, and there are doubts as to whether it will become law at all. House Majority Leader Eric Cantor is on the record saying that the House won’t take up the bill until the White House makes its position on it more clear, something that the Obama Administration has been loathe to do. While President Obama has said that he supports the goals of the legislation if not the method, there’s been no release of an official Statement of Administration Policy on the matter.
I’m not saying that China’s trade practices aren’t a concern and don’t merit a healthy amount of condemnation. That’s not even mentioning the abysmal state of human rights in Chinese factories and the fair-trade standards that are routinely ignored for the sake of profits and feeding the Chinese economic engine. But the place for such determinations of fair-play are at the bilateral discussion table and at the World Trade Organization, not in the halls of Congress. I’m a solid Democrat, but when reactionary bills come forward and the lines are divided more clearly by “which party introduced it” rather than “is it a good idea?” something is horribly wrong with the way policy is created.