Chinese Currency Bill Will Do Little to Improve Economy

Reuters and the Los Angeles Times report that a United States bill aimed at China’s currency policy is making its rounds around Congress. This bill would allow the United States government to slap countervailing duties on products from countries found to be subsidizing their exports by undervaluing their currency. Senator Charles Schumer (D-NY), one of the main bill supporters, said that “we simply have no choice but to defend and protect U.S. jobs and the U.S. economy.” Not only is Sen. Schumer’s view and bill wrongheaded, it is also dangerous as it can trigger retaliatory measures from China, which would cause harm on domestic consumers.

In 2010, China exported US$ 365 billion worth of goods to the United States, representing 19 percent of all U.S. imports. Most of these goods are electrical machinery (25 percent) and power generation equipment (22 percent), products that are geared towards the United States manufacturing sector. The traditional “Made in China” labeled goods (toys, footwear, plastic stuff) represents a much smaller amount of the United States — China trade deficit.

This bill would make these goods more expensive, and would in turn hurt United States’ manufacturing output and employment. Other imported goods would be affected, and United States’ consumers and manufacturers would bear the cost of this legislation. House Speaker John Boehner (R-Ohio) is right when he said that “I think it’s pretty dangerous to be moving legislation through the United States Congress forcing someone to deal with the value of their currency,” ”and that a U.S. bill is not the way to ‘fix it.'”

The legislation could also set off a trade war with China, spark reprisals by the Chinese, and open the U.S. to a World Trade Organization complaint. Devising policies that attempt to address domestic economic problems by shifting demand away from imports onto domestic goods (beggar-thy-neighbor policies), like this one, do not address the underlying problem of the economy. This type of policy was popular during the 1930’s, and was very unsuccessful. In this case, Chinese authorities artificially devaluing their currency should be of no concern to the United States Congress. Chinese currency devaluation is costly… to Chinese workers. It equates to a subsidy to American consumers who buy artificially low-priced goods, at no cost to the American taxpayer.

Blaming China for the economic stagnation in the U.S. is self-defeating and does nothing to address the real problems. Congress should instead focus on the underlying problems of the United States economy: overbearing regulations, regulatory uncertainty, and government meddling in private investments.