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Richmans' Trade and Taxes Blog
Congress plans ineffective action against Chinese mercantilism
Congress is giving the Obama administration until shortly after the upcoming G20 meeting. Then, if the Chinese do not strengthen the yuan and the administration continues to waffle, they plan to pass a bill that would probably lead to U.S. tariffs on many Chinese products. Here's a selection from a Business Week article which lays out the schedule:
There is bipartisan support for action:
“There is a clear and unified message this Congress would like to send to China and it is this: China is not acting in good faith and is aggressively engaged in a series of troubling and downright protectionist policies,” Michigan Representative Dave Camp, the top Republican on the panel, said today. China’s actions could “spur a breakdown in our relationship.”
But there is some division: American businesses are more worried about China's non-tariff barriers to American products, especially the catalogs published by the Chinese government which exclude American products from China's huge government-controlled sector. In November and December, the Chinese government threatened to exclude even those businesses producing in China if they didn't move their R&D and patents to China. Business Week briefly brings up this point:
Business representatives and lawyers said they were focused on China’s specific barriers to U.S. exports such as its indigenous innovation policy, not the exchange rate.
Congress should act, but it has the wrong goal. They should be requiring balanced trade, not a stronger yuan. If they take the action that they currently plan, the Chinese government could let the yuan rise while, at the same time, tightening its other barriers to American products.
What is needed is an across-the-board tariff on Chinese products whose rate is tied to the size of the US-China trade deficits. In 2009, China exported $305 billion worth of goods and services to the United States while the Chinese government only allowed its people to import $86 billion of American products.
With a tariff rate tied to the trade deficit, the Chinese government would be forced to take down its many tariff, non-tariff, and currency-manipulation barriers to United States products. American corporations would be able to produce in the United States and still have access to the Chinese market. Not only that, but the tariff would help balance the federal budget while being in complete compliance with a special WTO rule for trade deficit countries.
There is a simple truth here: Mercantilism is the strategy of maximizing exports and minimizing imports. The best way to fight it is to insist upon balanced trade.
Comment by Jake Crawford, 7/12/2010:
While we have heard the cry against the tarriffs for decades in defence of "free" trade, the only thing that has been free and fair is US imports. An immediate 20% tarriff on chineses imports would be a beginning to 1) raise substantial money 2) shake up china telling them we are serious and 3) increase domestic production and reduce unemployement.
Journal of Economic Literature:
Atlantic Economic Journal: