The United States Senate recently passed a bill which would require the Treasury and the Commerce Departments to impose retaliatory tariffs on nations that have under valued currencies. The main pusher of this bill is Senator Charles Schumer, Democrat of New York, but his effort is gaining bipartisan support. The bill is clearly aimed at China. The supposed justification for the bill is that China has kept its currency artificially devalued so it can sell more products in the United Sates, thus robbing Americans of jobs.
Those of us who are more skeptical would note that given today's election politics there could be strong political motives behind this bill. If this were merely election year posturing we could shrug it off with a "politicians will be politicians" attitude. However, I suggest that this seemingly patriotic proposal can be one of the more mischievous and pernicious exercises to come out of Washington in a long time (and that is tough competition).
Space does not permit a full discussion of the ramifications of this bill but some, in brief, follow.
China is in the process of leadership change, and U.S. bullying threats have reportedly damaged the prospects of candidates most willing to cooperate internationally with the U.S.
American companies doing business in China can be the target of retaliation, as already seems to have happened to Walmart.
This bill will not cause China to increase the value of the yuan. They will be responsive to their own significant economic issues which include inflation, managing an economic slowdown and a potential credit bubble. Actually these issues may lead them to devalue the yuan.
The Chinese have resented the overbearing U.S. approach. They had been allowing the yuan to appreciate because of their own internal economic concerns. But they now have modified their course and in recent days the yuan has been pegged lower.
Tariffs placed on Chinese imports would raise the prices Americans pay for Chinese imported goods. Other low-cost countries would step in to become the suppliers, but probably at a higher cost to Americans because Chinese competition would be restricted or eliminated. No significant number of American jobs would be created.
China is our biggest creditor, holding perhaps $2 trillion of U.S. bonds. As long as our government spends $1.5 trillion or so a year more than it takes in we need them to buy our bonds. If they stop, interest rates on our debt will rise and aggravate our fiscal mess. If they dump U.S. bonds the results would be worse.
China is the world's second largest economy and the U.S. must interact with it and seek its support in many areas, political, economic and military. Congressional insult is guaranteed to make this more difficult.
The most threatening fall out from this bill is that if enacted it could start an international trade war that would contribute to a worldwide depression. The lesson of the Smoot-Hawley Tariff Act of 1930 is too clear to be ignored. That act set U.S. tariff rates at historic highs. It achieved its goal and in two years U.S. imports fell by significantly. However, as many economists predicted at that time other countries followed suit and in less than three years U.S. exports to Europe fell by 66 percent. Between 1929 and 1934 world trade also fell by 66 percent. It took World War II to pull us out of the ensuing depression.
Beggar thy neighbor is never good policy.
From a politician's perspective this bill may seem like a sure vote getter. From a national perspective one wonders if this is a Washington version of children playing with matches. Is this the best we can expect?
Letson is an attorney in Warren. He was previously General Counsel of the U.S. Department of Commerce. He was also Vice President and General Counsel of Westinghouse Electric Corporation.