TCS Daily


How to Let China Know We're Serious

By Philip Levy - July 19, 2007 12:00 AM

           The burgeoning U.S. trade deficit with China has attracted bipartisan alarm on Capitol Hill this summer. Unsatisfied with the Treasury's more patient attempts at dialogue with the Chinese, pressure has mounted to take action to force China's hand. While China ought to revalue its currency, the concerned Congressmen would do well to focus on domestic measures more directly under their control.

Taking a a more direct approach, Senators Baucus, Grassley, Schumer and Graham have jointly put forward a bill that would get tough with China if it fails to appreciate the renminbi. Last week, Senators Obama and Clinton signed on as co-sponsors. The sponsors assert that China's currency imbalance disadvantages U.S. producers and threatens the global trading system. They suggest that a little pressure on China might do the trick.

That analysis is a bit strange, since the Administration has been applying a little pressure for years and it hasn't done the trick. But hope springs eternal, and at least this is in keeping with the trend of the Congress taking over foreign policy (excursions to Syria to fix up the Middle East, trips to Lima to supervise Peruvian labor law).

There is a consensus that China's rapid accumulation of reserves is a sign of an undervalued exchange rate and is contributing to global economic imbalances. But the senators' proposal to threaten the Chinese with tougher anti-dumping measures is more than a little odd. The United States will take aggressively unilateral and protectionist trade measures in a valiant fight to save the multilateral open trading system.

Even if one can argue that with a straight face, the measures will probably be ineffective. I'm not talking about the fact that the Chinese are unlikely to respond well to unilateral confrontation. No, the problem is that these anti-dumping measures would only hit imports from China.

But aren't imports from China our problem? Wouldn't American workers start supplying Wal-Mart with toys and small electronics if only the Chinese were out of the way? Actually, no. In all likelihood, those goods would just come from another developing country, like Vietnam.

How can we know this? Because there have been cases over the last few years when U.S. producers have asked for bilateral protection under a special China safeguard called Section 421 (negotiated as part of the agreement to let China into the World Trade Organization). Public hearings were held about the likely effects. Importers testified in those hearings that were there to be protection against China, they would source from Vietnam or India or Brazil instead. China is the cheapest producer for many goods, but it's not the world's only cheap producer. The Administration chose not to offer protection in the 421 cases, since it would have hurt U.S. consumers without helping U.S. producers.

Nor were these 421 cases aberrant examples. If one looks at the share of U.S. imports coming from broader Asia over the last decade, one sees that China's rise has largely come at the expense of its Asian neighbors.

If a new anti-dumping measure were to drive production back to Malaysia or Indonesia, it would cut the bilateral U.S. trade deficit with China. It would probably raise costs a bit for U.S. consumers. But that would be it. No change in the overall U.S. trade deficit. No new high-paying manufacturing jobs for American workers. Just a stain on the United States' reputation as a global leader toward free markets and an angry and defiant China with a still-undervalued exchange rate.

Given the clamor for action against China, though, it may be impractical to dismiss the whole bill just because anti-dumping measures would be ineffective. If we're determined to threaten China, we should do it with an action that will really work. Let me therefore offer the following amendment in lieu of anti-dumping: If, after a suitable period of discussions, the Chinese still refuse to revalue the renminbi, Congress will cut federal spending!

Unlike the antidumping measure, this might actually help. It would reduce the federal deficit, thereby raising public saving. That would cut the amount that the United States needs to borrow from abroad. Less borrowing from abroad would necessarily mean a smaller trade deficit. It would also be a lovely gesture of respect for the international norms that the Senators are so eager to uphold, since the United States has been repeatedly criticized internationally for fostering global imbalances by its excessive borrowing. And a cut in farm subsidies, for example, would do wonders to support the open global trading system the Senators are trying to save. And there would be no way for nefarious importers to evade this measure by moving operations to another country.

              Now that would let the Chinese know we were serious.

The author is Resident Fellow, American Enterprise Institute.

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