China Currency Legislation Is a Desperate Mistake

The good news for those craving harmony in Washington is that that mythical elixir called bipartisanship has been spotted in Congress. The bad news is that it is finding its expression in an outbreak of self-destructive China-bashing.

After 8 years of threatening punitive action to compel appreciation of the Chinese currency at a pace deemed acceptable by U.S. politicians (a period, by the way, in which the Yuan appreciated by 30% against the dollar in nominal terms—and by much more in real terms), lawmakers may just pull the trigger this time. If so, their action should be seen for what it is: a vote of no confidence in themselves as a body capable of producing solutions to the nation’s economic stagnation and monumental budget and debt woes.

China currency legislation is a diversion – a shell game. Despite the opinions of Harold Meyerson and Fred Bergsten, there simply isn’t any evidence that a stronger Yuan will produce a smaller bilateral trade deficit or that a smaller trade deficit will boost employment. Indeed, policymakers shouldn’t be targeting trade deficit reduction in the first place—let alone a bilateral trade deficit, which is meaningless in a world dominated by trade in intermediate goods.

As explained here and here, globalization with it transnational production sharing and cross-border investment has mitigated the impact of currency values on trade flows. Because the value of imported inputs accounts for about half of the value of Chinese exports, a stronger Yuan reduces the prices of imported inputs used to manufacture and assemble products in China for export to the United States and elsewhere. This dampens any expected impact of a rising currency. In fact, between July 2005 and July 2008 the renminbi rose 21% against the dollar, to $.1464 from $.1208, where it had been pegged since 1997. But the U.S. bilateral trade deficit increased from $202 billion to $268 billion over that period. Since June 2010, the Yuan has appreciated by 7 percent against the dollar, but the bilateral trade deficit is on target to be 34% larger in 2011 than it was last year. And (as described here and here) there is no discernible relationship between trade deficits and employment.

Broader support on Capitol Hill for currency legislation boils down to this: with public approval ratings hovering in the low-to-mid teens, an embattled Congress is looking for plausible scapegoats for the dismal state of U.S. economic affairs. Thanks to a lot of media-driven hype about China’s inexorable rise at U.S. expense, Americans fear China almost as much as they loathe Congress. A vote to reclaim American jobs stolen by China—as the currency legislation is so disingenuously characterized by some of its supporters—enables politicians to return to their states and districts with concrete evidence of the seriousness of their efforts.

Only it’s not serious. It’s deeply dismaying. Instead of working hard to change homegrown U.S. policies that inhibit investment, job creation, and growth, our elected officials would choose to lay the blame for our woes at China’s feet, then cross their fingers and hope that their provocative, unilateralist legislation doesn’t unleash a torrent of adverse consequences that would make economic matters even worse. Can there be a stronger admission of failure than to launch such a desperate Hail Mary?