Who’s Manipulating Whom?

Cato study documents benefits of trade with China despite currency fears

July 11, 2006

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WASHINGTON – Imposition of punitive, unilateral trade sanctions by the United States against imports from China in response to China’s fixed currency regime would be “a colossal policy blunder,” according to a study released today by the Cato Institute.

In the Cato Trade Briefing Paper, “Who’s Manipulating Whom? China’s Currency and the U.S. Economy,” Daniel Griswold, Cato’s director of the Center for Trade Policy Studies, directly challenges the prevailing consensus that imports from China are hurting the U.S. economy and that China’s fixed currency is largely to blame.  The study argues for freer trade between the world’s two most dynamic major economies, cutting through the mercantilist fog to document that Americans benefit from imports from China as well as exports to China.

Griswold points out: “Tariffs on imports from China would amount to a direct tax on tens of millions of U.S. households that buy those $200 billion in consumer goods we imported from China last year.” He adds: “A tax on imports from China would mean higher prices for shoes, clothing, toys, sporting goods, bicycles, TVs, radios, stereos, and personal and laptop computers.”

The study finds that the sharp rise in imports from China is not primarily driven by China’s currency regime, but by its emergence as the final link in an increasingly intricate East Asian manufacturing supply chain. As Griswold concludes, “If China were to move toward a more freely floating currency, evidence and experience suggest it would not have a noticeably positive effect on U.S. manufacturing, employment, or the bilateral trade balance with China.”

On Wednesday, July 19, at 12 p.m., Nicholas Lardy, Frank Vargo, and Daniel Griswold will discuss the status of reform in China, the impact of U.S.-China trade and exchange rates on our economy, and what change, if any, should be made in U.S. economic policy toward China at a Cato Policy Forum. For details, please click here.

Trade Briefing Paper #23