Economist's View: How Should The U.S. Respond to China's Peg?
リンク: Economist's View: How Should The U.S. Respond to China's Peg?.
How Should The U.S. Respond to China's Peg?
An editorial in the NY Times by Charles E. Schumer (D-NY) and Lindsey O. Graham (R-SC) calls for the threat of tariffs on imports from China if concrete steps towards removing the currency peg to the dollar are not implemented immediately. Cato is not happy with the administration or with Schumer and Graham:
There is agreement from both sides of the fence that China’s currency ought to be revalued and sooner is better than later. The question here is what means we should use to bring this about. I believe proposals such as that by Schumer and Graham while perhaps having the potential to convince China that free float (or at least managed float) is best for all in the long-run, such proposals also have the potential to do considerable harm by undercutting free trade, a move that history shows has the potential to lead to economic disintegration (Krugman and Obstfeld’s 6th edition has a nice discussion of this in chapter 18). Whether we threaten or not, China will eventually learn the lessons learned long ago – that Mercantilist policies designed to minimize imports and maximize exports are not the best means to maximizing the wealth of a nation. I would prefer to avoid the downward spiral implicit in the Schumer and Graham proposal. If China feels the need to show it has no intention of responding to pressure from the U.S. and maintain its peg, and tariffs are imposed, then this legislation may set us upon a path to less economic integration.
[Update #1: Cynics Delight has a nice discussion of this topic.]
[Update #2: Bloomberg's William Pesek Jr. discusses this topic in Are China Tariffs Smoot-Hawley of Our Day?]
First, as this post from David Altig argues, a revaluation is unlikely to have a substantial effect on the U.S. economy. Second, as noted at Angry Bear, Greenspan does not see large effects from devaluation either:Stop The Mercantilists, by Steve H. Hanke, Cato: Washington's modern-day mercantilists believe trade deficits can be managed by altering exchange rates. Therefore it's not surprising that China's currency, the yuan, is in the crosshairs. According to the Washington consensus the yuan is undervalued. This allegedly makes our imports from China artificially cheap and our exports to China artificially expensive. To level the playing field, the managed traders recommend an upward revaluation of the yuan. This solution has broad support. The Bush Administration wants it, the China Currency Coalition wants it, and Senators Charles Schumer (D-N.Y.) and Lindsey Graham (R-S.C.) want it. They have a bill, up for vote in July, to slap an across-the-board 27.5% tariff on Chinese imports if China fails to revalue the yuan within six months.
Third, recall Krugman’s comments:The Bush administration's effort to increase pressure on China to overhaul its currency regime got less than rave reviews from Federal Reserve Chairman Alan Greenspan and key central bankers from China, Europe and Japan. Greenspan disputed the contention of U.S. manufacturers that a revaluation of China's yuan would make a significant impact on America's soaring trade imbalances.
So Krugman sees more dire consequences than Altig and Greenspan, but still the call is for China to float its currency now rather than later, a move that in the long-run will be beneficial to U.S. labor in terms of job creation.Here's what I think will happen if and when China changes its currency policy, and those cheap loans are no longer available. U.S. interest rates will rise; the housing bubble will probably burst; construction employment and consumer spending will both fall; falling home prices may lead to a wave of bankruptcies. And we'll suddenly wonder why anyone thought financing the budget deficit was easy.… I'm not saying we should try to maintain the status quo. Addictions must be broken, and the sooner the better. After all, one of these days China will stop buying dollars of its own accord. And … a rise in the yuan and other Asian currencies will eventually make U.S. manufacturing, which has lost three million jobs since 2000, more competitive...
There is agreement from both sides of the fence that China’s currency ought to be revalued and sooner is better than later. The question here is what means we should use to bring this about. I believe proposals such as that by Schumer and Graham while perhaps having the potential to convince China that free float (or at least managed float) is best for all in the long-run, such proposals also have the potential to do considerable harm by undercutting free trade, a move that history shows has the potential to lead to economic disintegration (Krugman and Obstfeld’s 6th edition has a nice discussion of this in chapter 18). Whether we threaten or not, China will eventually learn the lessons learned long ago – that Mercantilist policies designed to minimize imports and maximize exports are not the best means to maximizing the wealth of a nation. I would prefer to avoid the downward spiral implicit in the Schumer and Graham proposal. If China feels the need to show it has no intention of responding to pressure from the U.S. and maintain its peg, and tariffs are imposed, then this legislation may set us upon a path to less economic integration.
[Update #1: Cynics Delight has a nice discussion of this topic.]
[Update #2: Bloomberg's William Pesek Jr. discusses this topic in Are China Tariffs Smoot-Hawley of Our Day?]
