Congress Picks Wrong Fight with China
Scoring points on currency rates may make good political sense, but it's lousy policy.
Don’t look for a rush of new American jobs as a result of Congress’ latest attempt to prod China into letting the value of its currency rise. The legislation, which recently cleared the Senate but faces an uncertain future in the House, isn’t likely either to boost U.S. exports to China or to significantly reduce U.S. imports, if passed. Moreover, it could well spur the Chinese into retaliating against U.S. tariffs and subsidies, setting off a dangerous trade war.
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There’s little disagreement that China has been manipulating its currency. It has limited the rise of the yuan to help give Chinese firms an edge both at home and abroad. Foreign goods are less competitive in China’s markets, and Chinese imports are cheap in America. That’s one reason the U.S. is running a massive $278-billion trade deficit with China. But the proposed solution is off the mark on several counts.
First, Washington may be worrying about the wrong set of exchange rates. America’s major competitors, both in China and abroad, are Europe and Japan. They export the same kinds of goods as the U.S.—from capital equipment, such as aircraft and engines, to farm products, chemicals and scrap. It’s the dollar’s value against the euro and the yen, not the yuan, that determines how American exporters fare against Chinese competitors, says Robert Z. Lawrence, a Harvard University economist who specializes in trade issues. “People who focus on the [yuan] are worrying about the wrong thing,” he says.
Second, the legislation now being considered by Congress is largely symbolic and won’t have much practical effect. Though U.S. companies that asked for relief from unfair trade practices would be able to cite China’s currency manipulation as a factor and potentially could get offsetting duties imposed on competing Chinese goods, trade complaints inevitably involve single products. Winning relief from imports on Chinese-made steel or tires won’t make a big enough difference to reduce the U.S. trade deficit or to create more U.S. jobs. Broadening such complaints to apply to all Chinese imports is neither practical nor legal under international rules.
Third, the main reason the U.S. is losing jobs to China isn’t because the yuan is cheap, but because China has lower wages. Over the past 20 years, substantial numbers of U.S. jobs have migrated to China. In fact , many products that carry U.S. brand names are now made in China (or elsewhere abroad). Buick, for example, is the hottest-selling car in China, and it’s made entirely over there, not in Detroit. Apple computers are all made outside the U.S. Sales of such products in China aren’t affected much by the yuan’s value against the dollar.
And Americans aren’t likely to buy fewer Chinese imports if the yuan appreciates. Many of the goods that China exports to the U.S.—apparel, electronics and low-end auto parts, for example—aren’t widely made in the U.S. And if U.S. tariffs made Chinese products too expensive, the factories would move to other low-wage countries.
In fact, the past few years’ experience has shown that raising the value of the yuan won’t do much to affect jobs or the U.S. trade deficit. China has let its currency appreciate by some 30% since mid-2005, when it unpegged the yuan from the dollar, but the shift hasn’t altered the trade deficit or jobs picture in the U.S.
Still, economists generally agree that Beijing’s insistence on maintaining a huge trade surplus is impeding the global recovery. But Japan, Taiwan, South Korea and Thailand all have large surpluses, and Congress isn’t targeting them. In political terms, China makes a better scapegoat. Economically, it’s a more dangerous one.
The most likely impact of the legislation now before Congress is that it would intensify trade tensions with China—much to America’s disadvantage. China could successfully appeal punitive U.S. tariffs to the World Trade Organization. And it almost certainly would retaliate in other ways.
China is already America’s fastest-growing export market. It has eclipsed Japan and Mexico to become America’s second-largest trading partner, after Canada. And the big problem for U.S. firms trying to sell more in China is one of access, not exchange rates. China has hundreds of regulations, subsidies and buy-Chinese policies that block imports.
The best way to tackle the imbalance is by quietly persuading China to realize that reducing its trade surplus is in its own best interest. True, Chinese exporters would be hurt, globally, at the start. But the move would help slow inflation in China and would pave the way for liberalization of China’s capital markets—both big pluses for Beijing.
At the same time, U.S. exporters would need to try harder. American firms are far behind those of Germany, Japan and Brazil in penetrating the Chinese market, mainly because they didn’t make as great an effort to sell there, according to a study concluded last winter by the American Chamber of Commerce in Shanghai. “The U.S. is not taking full advantage of the China market.”