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Richmans' Trade and Taxes Blog
Obama's Failing China Strategy
James Morrissey, Washington Correspondent for Textile World had a very interesting February 9 report about Obama's China strategy:
At a meeting with the Senate Democratic Policy Committee, the president said, "We must get much tougher about enforcement of existing trade rules, putting constant pressure on China and other countries to open their markets in reciprocal ways."
Obama specifically mentioned currency manipulation, saying, "One of the challenges that we've got to get much tougher about is currency rates and how they match up to make sure that our goods are not artificially inflated and their goods are not artificially deflated in price." He said such actions place the United States at "a huge competitive disadvantage."...
The Democratic Senators seem content to follow Obama's, leadership, but Republican Senator Grassley is urging stronger action. Morrissey reports:
At a Senate hearing following Obama's comments, Sen. Charles Grassley, R-Iowa, the ranking Republican member of the Senate Finance Committee, urged the Obama administration to label China a currency manipulator, a step the administration has been reluctant to take, opting instead to rely on diplomatic negotiations. Saying he has given the administration the "benefit of the doubt on diplomatic efforts, but so far that has not produced any results," Grassley said it is time to label China a currency manipulator and impose U.S. trade law remedies.
Obama may realize that the future of the American economy depends upon whether or not American exports participate in the world's fastest growing markets. But his strategy, so far, has only resulted in Chinese tariffs on American products. His tariffs on Chinese tires resulted in Chinese tariffs on American nylon products, His meeting with the Dalai Lama and sale of fighters to Taiwan resulted in Chinese tariffs on American chicken parts. He is combining diplomatic and economic tit-for-tat in a gradualist trade-war strategy that only serves to reduce imports on both sides.
The United States could open Chinese markets by imposing a trade system which ties our imports from China to their imports from us. In Trading Away Our Future, my father, son and I recommend that the U.S. limit the value of our imports from the mercantilist countries to the value of their imports from us, in accordance with a special WTO rule for trade deficit countries.
University of Maryland economist Peter Morici recommends a "Currency Conversion Tax" that would have a similar effect. Here is how he described his proposal in Congressional testimony before the House Committee on Foreign Affairs on March 12, 2009:
Simply, the United States should give China the opportunity, with a hard deadline, to manage down its trade surplus with the United States, either through meaningful and complete currency revaluation—complete means raising the dollar value for the yuan to a level that reduces China’s trade surplus with the United States by one third each year and to zero after three—or through other domestic means of Beijing’s choosing.
If China declines, the United States should simply tax dollar-yuan conversion in proportion to its official and surrogate currency market interventions. The United States should impose a tax equal to the quarterly value of China’s intervention divided by its exports of goods and services. China would then have a strong incentive to reduce and then stop intervening.
If China does not reduce and eliminate intervention and chooses for the United States to tax currency conversion, then the benefits from a revalued yuan of higher prices for Chinese imports that should go to Chinese businesses would instead go into the U.S. Treasury. If China reduces and then eliminates one-way intervention and lets its currency rise to a value that balances trade, Chinese businesses would capture those benefits in the form of higher dollar prices for their goods.
Either plan could be enacted by Congress with or without the approval of President Obama. The Democratic Senators should not sit on their hands. If they don't act, the economy will continue to stagnate and Obama will not be the only incumbent thrown out of office by angry voters.
Journal of Economic Literature:
Atlantic Economic Journal: