Commentary

Protectionism No Fix for China’s Currency

By Daniel Griswold
June 25, 2005
The Bush administration has joined a rising chorus of voices in the U.S. Congress to demand that the Chinese government raise the value of its currency — or else.

On June 21, four members of the House introduced a bill that would impose steep tariffs on Chinese goods equal to the advantage they supposedly gain from that country’s “manipulated” currency. A similar amendment offered in the Senate by Charles Schumer (D-N.Y.) and Lindsey Graham (R-S.C.) won broad support in a test vote in April. Supporters of the get-tough approach claim that China’s currency is fixed at an undervalued rate that makes imports from China artificially attractive while discouraging U.S. exports to China. As evidence, they cite America’s $160 billion bilateral trade deficit with China.

China should and probably will allow its currency to readjust in the not-too-distant future, but heavy-handed threats from Congress and the White House are based on populist nonsense that, if enacted into law, would inflict real damage on American families.

If the purpose of China’s fixed currency has been to discourage imports into China, it has been a spectacular failure. China’s growing economy has whetted a voracious appetite for imports. The value of goods imported into China grew by 40 percent in 2003 and another 36 percent in 2004, faster than the growth of its exports. According to figures recently released by the World Trade Organization, China is now the world’s third-leading importer, behind only the United States and Germany.

China’s growing demand for imports includes a broad range of U.S. products, from wheat, soybeans, and raw cotton, to plastics, semiconductors, and industrial machinery. In fact, since 2000, U.S. exports of goods to China have more than doubled to $35 billion while U.S. exports to the rest of the world have grown a paltry 2 percent. Last year, China was the fifth-largest market in the world for U.S. exports.

China’s fixed currency cannot be blamed for recent troubles in U.S. manufacturing. U.S. manufacturing output is actually 45 percent higher than it was when China first fixed its currency to the dollar in 1994. Manufacturing employment has fallen in the United States in recent years, not because we are manufacturing less, but because our workers are so much more productive. The textile and apparel industries, which compete most directly with Chinese imports, have been shedding jobs for decades, long before China emerged as a global competitor.

China’s current currency policy is really the opposite of “manipulation.” For more than a decade, through dramatically changing economic and political circumstances, the Chinese central bank has maintained its currency at a fixed 8.28 yuan to one U.S. dollar. In the late 1990s, as other Asian currencies were crashing through the floor during the financial crisis, China held its currency steady. Its exchange-rate policy was praised back then for maintaining stability in a region in economic turmoil, even though it undoubtedly compromised China’s competitiveness in the short run compared to its Asian neighbors.

Obsession with our bilateral trade deficit with China misses the whole point of trade. Americans benefit from imports from China as well as exports to China. We import so much from China because its workers excel at producing lower-end consumer goods, while Americans constitute the world’s biggest consumer market. And the dollars the Chinese earn from selling in the U.S. market are not stuffed in mattresses. They come back to the United States, either to buy our exports, or to invest in U.S. Treasury bonds, which helps to keep U.S. interest and mortgage rates lower than they would be without Chinese investment.

Slapping steep tariffs on Chinese goods would disrupt our mutually beneficial relationship with the world’s most dynamic economy. It would jeopardize one of our few growing export markets. It would sock tens of millions of working families in America with a regressive tax on such basic items as shoes, clothing, and consumer electronics imported from China. And it would alienate an important regional power in East Asia as we try to contain North Korea.

China’s government should plan to switch to a floating currency at some point. All major economies in the world allow their currencies to float more or less freely because a floating currency allows exchange rates to adjust incrementally to changing economic circumstances. But the transition in China should be done in the right way and at the right time, not under congressional threats to launch a self-damaging trade war.

Daniel Griswold is director of the Cato Institute’s Center for Trade Policy Studies.