The passage of the Currency Exchange Rate Oversight Reform Act by the U.S. Senate, which penalizes China for its “fundamentally misaligned” currency, sends a signal that bashing China will be an important part of the political landscape of this election cycle. The legislation had bipartisan support, with 63 Senators agreeing that sanctions should be used against countries like China that purposefully undervalue their currencies to gain a competitive advantage.
High U.S. unemployment and sluggish growth going into an election year make China, with its solid growth and large trade surplus with the United States, an easy target for politicians who are looking for a scapegoat for their own failures in taking prudent actions to solve long‐term problems.
Republican Senator Olympia Snowe, one of the co‐sponsors of the reform act, asserted, “China’s currency manipulation has been among the greatest impediments to our manufacturing sector.” She never mentions that high union wages and high taxes on capital formation have been far more important in destroying U.S. jobs.
Likewise, Democratic Senator Charles E. Schumer, another sponsor, accused China of “getting away with economic murder.” He does not mention that U.S. consumers, including firms that rely on intermediate goods from China, have greatly benefited from a policy of engagement.
Such hyperbole is normal during elections, especially presidential elections, but at this juncture there is a danger that the rhetoric will turn into reality and end with increasing protectionism. Last year when the Democrats controlled the U.S. House of Representatives, a bill similar to the Senate’s was passed by a wide margin. Although current House Speaker John Boehner, a Republican, has called the reform act “dangerous,” there are many Republicans who support sanctions on China. Meanwhile, President Barack Obama has accused China of “currency manipulation,” though he later retracted that statement, and blames China for “gaming the trading system.”
Imposing tariffs on China for undervaluing its currency, which the reform act considers a form of subsidy and an unfair trade practice, would not solve the U.S. economic malaise — but it would invite retaliation. Schumer already sees the United States in a “trade war” with China. He doesn’t seem to recognize that trade is not a zero‐sum game, in which one party wins and the other loses. That type of mercantilist thinking — that exports (trade surpluses) are good and imports (trade deficits) bad — is at the heart of today’s vitriolic attacks on China.
The rhetoric coming out of Washington, including by Republican presidential candidate Mitt Romney, blaming China for cheating and for unfair trade practices, has resonated with many voters who see a rising China as a threat to U.S. economic and military power.
In a recent poll of U.S. attitudes toward China, the Chicago Council on Global Affairs found that “nearly two thirds of Americans believe China practices unfair trade.” Nearly half of those polled believe China’s large holdings of U.S. government debt pose a “critical threat to vital U.S. interests.” Nevertheless, a “strong majority” of Americans still “prefer to undertake friendly cooperation and engagement with China.” That is the position that President Obama will almost certainly take and the one that the Republican candidate will eventually turn to, for it is the only path toward peaceful development.
So while there may be some short‐term advantages to bashing China, the benefits of strategic and economic dialogue are obvious to all serious parties. Catering to unions and other protectionist interests may win votes, but going too far toward protectionism risks a real trade war and a threat to the liberal trading order that has substantially reduced poverty in emerging markets like China and India.
The very reason China is receiving so much attention in the U.S. media and in the political arena is that it has become the world’s second largest economy, the largest exporter, the second largest U.S. trading partner after Canada, and the largest foreign holder of U.S. public debt. Those facts should not overshadow the truth that China is the fastest growing market for U.S. exports and that U.S. manufacturing surpasses China in churning out high valued‐added goods.
Treating trade like war is risky. It leads to economic nationalism and conflict, not social harmony. China should be congratulated for its economic liberalization that has increased the range of choices open to people, thus increasing personal freedom and prosperity. Trade disputes should be settled through the World Trade Organization, not through politics.
There are of course legitimate issues that need to be raised and will receive significant attention during the presidential debates. China’s rising economic strength will allow a substantial increase in military spending. That change will impact the Asia‐Pacific region and be a key focus of Sino-U.S. relations during the next decade and beyond. The presidential candidates will have to address that issue. Likewise, questions of market access, intellectual property rights, product safety and human rights will be aired along with issues of financial repression, subsidies, and exchange rate misalignment.
The fact that many Americans favor a policy of engagement with China rather than conflict is a promising sign that Sino-U.S. relations will evolve in a positive direction, even if the political rhetoric heats up.