The typical folk tale has three examples, as in the Three Little Pigs and Goldilocks and the Three Bears. After the third example, even little children can see the pattern.
On July 8, Treasury Secretary Timothy Geithner gave us the third example from which we can judge his reliability. He issued his third semiannual report to Congress about which countries are manipulating their currencies. For the third time, he concluded that China is not manipulating its currency.
In contrast, the report's annex notes that the Chinese government had accumulated $2.4 trillion worth of currency reserves by December 2009 as part of its mercantilist strategy. The Chinese government maximizes exports and minimizes imports and makes up the difference by buying foreign currencies in order to keep its own currency undervalued, so that its industries can steal market share, investment, and jobs from its trading partners. The Chinese government's recent 1% strengthening of the yuan from 6.83 per dollar to 6.78 does not change this equation.
Geithner's report undercuts Senator Schumer's bipartisan Currency Exchange Rate Oversight Reform Bill, designed to end Chinese currency manipulations. That bill relies upon the U.S. Treasury Secretary to identify which countries are manipulating their currencies and identify when those countries have stopped their currency manipulations.
It is clear that Congress needs to base its bills on something more reliable than the Treasury Secretary's determinations. I suggest that American policy be based upon verifiable statistics.
Senator Schumer should revise his bill so that it imposes across-the-board tariffs on every country that has been engaging in mercantilism as evidenced by over $100 billion of foreign exchange reserves. According to the Treasury report's annex, the following countries had over $100 billion worth of such reserves as of December 2009:
China - $2,399 billion
Japan - $997 billion
Russia - $399 billion
Saudi Arabia - $397 billion
Taiwan - $348 billion
Korea - $265 billion
India - $259 billion
Brazil - $229 billion
Euro Area - $195 billion
Singapore - $187 billion
The tariff rate should be designed to collect 50% of our trade deficit with that country. It should go up when that trade deficit goes up, down when that trade deficit goes down, and disappear when that trade deficit approximates balance. (In the case of Brazil, there would be no tariff, because there is no trade deficit.) The Chinese and other mercantilist governments could then reduce our tariff rates by taking down their many tariff, non-tariff, and currency-manipulation barriers to our products.
Here's how the numbers of our proposal would work with China. In 2009, we imported $305 billion from China, but the Chinese government only let its people import $86 billion from us, creating a trade deficit of $219 billion. With a tariff designed to take in 50% of our trade deficit, that would be 50% of $219 billion, which is $109.5 billion. An initial tariff rate of 36% on $305 billion of imports from China would be designed to take in that $109.5 billion in tariff revenue. This is just about right, since 36% is approximately the amount by which the yuan is undervalued.
Such a bill would simultaneously enhance American businesses that export and American businesses that compete with mercantilist-undervalued imports. It would pull the United States out of this depression, just as an improving trade balance with Europe in 1939 pulled the United States out of the last one. Moreover, it would be in compliance with a special WTO rule which lets trade deficit countries restrict imports in order to avoid balance of payments problems.
Secretary Geithner has now proven three times that he cannot be relied upon to accurately report currency manipulations. It is time for Congress to write a bill that does not rely upon administration declarations, but instead relies upon honest trade numbers.
Comment by FrankTech, 7/12/2010:
Extremely extremely naive. Using trariffs will just create a tariff war because China would raise tariffs for USA goods. Let the USA dollar go down which would devalue other countries USA dollar holdings and play China's game by restricting Chinese imports using other methods. Also high tariffs would be paid for by US customers or the US customers would stop buying cheap goods (which currently benefits USA customers and keeps the cost of living in USA low).
[An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]
Journal of Economic Literature:
[Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....
Atlantic Economic Journal:
In Trading Away Our Future Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]