Currency Cretinism

Currency Cretinism
By Ross Kaminsky on 10.7.11 @ 6:09AM

What is Mitt Romney doing siding with Chuck Schumer in his protectionist pandering against China and the American consumer?

When the front-running Republican presidential hopeful agrees with Senator Chuck Schumer (D-NY) on an economic policy, you know we have a problem. Unfortunately, that's the situation we find with former Massachusetts Governor Mitt Romney agreeing, at least in principle, with legislation proposed by Schumer and Senator Sherrod Brown (D-OH) that threatens China with trade tariffs if it does not devalue its currency, the yuan.

Indeed, last month a Wall Street Journal blog wondered aloud whether the legislation should be termed the "Schumer-Brown-Romney Bill." To be sure, Romney has not said that he supports this bill, but his "Believe in America" economic plan is quite specific: In a section entitled "Five Executive Orders for Day One," Romney tells us that he will "[d]irect the Department of the Treasury to list China as a currency manipulator in its biannual report and direct the Department of Commerce to assess countervailing duties on Chinese imports if China does not quickly move to float its currency." And nearly half of the "Trade Policy" section of Romney's plan comes under the heading of "Confronting China."

Allow me to offer you an analogy:

If Store A sent you a coupon for a ten percent discount on anything in the store, anytime you shopped there, would you scream at the utter unfairness to Store B which is also trying to get your business? Or would you say "Thanks, that savings really helps! Now I have more money left over for a better car or a better school for my kids or the vacation I otherwise couldn't afford."

China's keeping their currency at a lower value than it would likely trade at in a free market is their equivalent of giving every American just such a coupon, at least for the many items we buy every day that are made in China. They are in effect taxing their own citizens to subsidize American (and other non-Chinese) consumers.

Let's put this another way: According to U.S. Census Bureau data, the U.S. is on track to import about $375 billion of goods from China in 2011. If everything we buy from China is ten percent underpriced because of "currency manipulation," that means the Chinese government has made a $37 billion gift to Americans at the expense of its own people.

And we're supposed to be angry about this?

Currency demagogues, like both Mr. Schumer and Mr. Romney, are playing to the economically poorly informed, to put it kindly. They make two particular protectionist arguments that are excellent sound bites but are completely false.

First, they claim that a higher-valued yuan will create manufacturing jobs in America. That is simply false. For low value-added items where much of the product's cost is labor -- which is the vast majority of what we import from China -- if China becomes less competitive those jobs may move to Thailand, Vietnam, or Brazil, but not to the United States. Therefore, our trade deficit with China will decrease but our total trade deficit will not. Indeed, to the extent that those other countries are less cost-competitive than China is now, but still competitive enough that prices of goods to be made there are not so much more expensive than Chinese goods that it would cause a decrease in demand, our overall trade deficit would likely rise.

And that brings me to the second point, inherent in the term "trade deficit." A trade deficit is not, unlike our federal budget deficit, a loss to the American people. Unless the Chinese are stuffing their export-earned dollars into mattresses, they must use them to buy something, and much of what they buy will be American, whether financial or physical assets. And if they buy from foreigners, then those foreigners must spend their dollars. Eventually all dollars must return to the U.S. (except those being hoarded or kept as collector's items to recall the day when a dollar was worth something).

Whereas a budget deficit represents money that must be collected from taxpayers sooner or later, a trade deficit has no such implication. It is not a liability to be repaid by Americans. It is not surprising, however, that since both terms contain the word "deficit," many Americans think that both are a problem.

As economist Don Boudreaux explains, the trade deficit is often little more than an accounting convention -- though one that is routinely used by politicians to scare voters into supporting bad, protectionist policies:

Consider two cases. First, Americans buy $1 million worth of textile imports from the Chinese who then buy $1 million worth of pharmaceutical exports from Americans. The result: balanced trade.

Second case: Americans buy $1 million worth of textile imports from the Chinese who then buy $1 million worth of land in Texas. The American seller of the land immediately spends this $1 million on American-made pharmaceuticals. (Perhaps the Texan is opening a pharmacy.) The result: a $1 million U.S. trade deficit.

In both cases, Americans producers sell an additional $1 million worth of output as a consequence of Americans importing $1 million worth of goods. So -- although America runs a trade deficit only in the second case -- the employment effects in both cases are identical.

Since claims of a stronger yuan creating employment in America are not credible, the real complaint about the trade deficit must then be that foreigners end up owning some American assets, whether paper assets like stocks and bonds, or physical assets like buildings. And while there may be a legitimate (but weak) "national security" argument against such occurrences, it is more likely xenophobia at play, much as Americans reacted negatively when the Japanese bought Pebble Beach and Rockefeller Center in the 1980s (both of which they lost an enormous amount of money on and then sold). In the meantime, thank China for the low interest rate you're getting when you refinance your house.

How many of you buy food at a supermarket? Of those of you who raised your hands, how many sell things to the supermarket? No hands? Hmmm. This means of course that each of you has a trade deficit with your supermarket equal to 100 percent of what you spend there. Do you feel abused? Ready to call your congressman?

Yes, let us enact legislation to prevent trade deficits with supermarkets! All it will take is for each of you to grow, make, or barter for enough meat, milk, vegetables, paper towels, or dishwashing liquid to sell to the supermarket to offset the value of everything you buy from them. Sure, you won't have time to have an actual job, or maybe you can just keep little Johnny out of school and put him to work on the farm. But, hey, at least you won't have that evil trade deficit.

A trade deficit represents nothing more than somebody else being able to deliver something you need at a price less than you can, or are willing to, provide it for yourself. The fact that the trade deficit with the Chinese is so large simply means they are providing lots of things to Americans far cheaper than we can provide them ourselves and, as such, should engender our gratitude rather than anger.

There is plenty to complain about with China, particularly its utter disdain for intellectual property and patent protection. Mitt Romney is right to assail China on this score. Its human rights record is appalling, as are its consistently pro-dictator votes in the United Nations. China is, to be sure, a competitor of the U.S. and not our ally. But its practice of keeping the yuan undervalued -- in part to try to prevent the social unrest that would come with massive unemployment in a basically poor country -- is a boon to the United States, the crocodile tears of Richard Trumka notwithstanding. It bears repeating that increasing unemployment in China will not cause decreasing unemployment in the United States.

The protectionist panderers also fail to mention that China has been letting its currency adjust, in part aiming to assuage American politicians (though the Chinese would never admit such a thing) and in part to reduce inflation in China. The Chinese first began allowing the yuan to appreciate in price in May 2005. From that time until mid-2008, the value of the currency rose in value by about 21 percent. After about three more years of a currency "peg," the yuan began floating again and has been increasing steadily against the dollar. All told, in the last six years, the yuan has appreciated about 30 percent, going from about 8.3 to the dollar prior to May 2005 to under 6.4 to the dollar now.

What part of "they're already doing what you want" do Schumer and Romney not understand? The part that union leaders and other anti-capitalists don't want them -- or you -- to understand. As the Economic History Association puts it, "Economists are almost uniformly critical of tariffs. One of the bedrock principles of economics is that voluntary trade makes everyone involved better off." Indeed, if one side imposes tariffs to protect its uncompetitive domestic producers, its trading counterparties are economically better off if they do not respond in kind. But sound economics is not always, and perhaps not even often, good politics in a nation of people with so little economic education.

Again paraphrasing Boudreaux, if a nation we trade with wants to fill its harbors with boulders to prevent foreign goods from getting in, does that mean America should then start filling her own harbors with boulders? If it sounds like something between economic masochism and economic suicide, that's because it is -- and tariffs are the boulders of trade policy.

(One exception to this would be to counteract "dumping," where a foreign supplier is selling items at a loss for the primary purpose of putting our domestic producers out of business, following which the foreign producer would intend to gain monopoly pricing power. Though this is not the case with the majority of trade with China, dumping did appear to be happening with Chinese steel imports into the U.S. in 2009 and China lost a case on the issue at the U.S. International Trade Commission. On the other hand, China won a significant victory regarding "anti-dumping and countervailing duties" at the World Trade Organization earlier this year. And just two months ago, the U.S. also won a more questionable World Trade Organization (WTO) suit against China regarding imports of Chinese tires. Within certain industries, the question of Chinese dumping remains alive and valid. But this is an entirely different question from currency valuations which impact every Chinese product.)

Mitt Romney isn't alone in his currency cretinism. Plenty of Republicans in the Senate voted for the Brown-Schumer bill when it passed a procedural hurdle in the Senate on a 79-19 vote on Monday. And the bill's co-sponsors included Republicans Lindsey Graham (SC), Richard Burr (NC), Olympia Snowe (RINO-ME), and Jeff Sessions (AL), the last of whom is smart enough to know better. Plenty of Republicans in the House of Representatives would support it if not for the wise and courageous position of Speaker of the House John Boehner, who is refusing to allow the bill to come up for a vote. Boehner stated what should be obvious to those who would be president: "It's pretty dangerous to be moving legislation through the United States Congress forcing someone to deal with the value of their currency."

In the meantime, from the "see, they can be taught" category, the vote to end debate on the Brown-Schumer bill passed by only 62-38, still enough to all but ensure final passage in the Senate but a remarkable change from just three days earlier.

Not surprisingly, Chuck Schumer is steaming mad, saying that Boehner is "siding with the Chinese government" and that "there's already a trade war going on [with China]." If there were a real trade war with China, nobody would mistake it for what we have today. Even a junior high history student -- and not even an "A-student" -- knows that imposing the Smoot-Hawley tariffs in 1930 was a major cause of the Great Depression's being so "great."

More importantly, Speaker Boehner is not siding with the Chinese government; he is siding with the American consumer, always the forgotten man when pandering politicians throw chum to union sharks and addled voters who are told to fear the Chinese instead being grateful for the tens of billions of dollars of savings brought to us by free trade and "currency manipulation."

If Mitt Romney's views on trade policy with China are troubling -- and shouldn't he know better than to agree with Chuck Schumer and Sherrod Brown on anything related to economics? -- there is some good news when it comes to the Republican field: Jon Huntsman has slammed Romney's plan saying "now is not the time… to enter a trade war." Herman Cain wants to "outgrow China" rather than fight it. Michele Bachmann last year voted against a bill much like Schumer's. And I can't find any evidence that any of the other Republican candidates suggest that the Schumer/Romney approach is the right one.

Unfortunately for Romney, his words are in black and white for everyone to see, and he has made a specific point in more than one debate about standing by what he has written. Fortunately for Romney, most Americans don't understand that a policy of "Confronting China" on the value of its currency is foolhardy bombast destined to fail and that a stronger yuan may not be a wise policy goal for America in the first place. As with so many politicians before and yet to come, the American consumer is the protectionist's "Forgotten Man." I expect such currency cretinism from Chuck Schumer, but America and the GOP deserve better than Mitt Romney's ill-conceived pandering.

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*Here is the list of nineteen Senators, all Republicans, who switched their votes from Yea to Nay on the Brown-Schumer Currency Cretinism Bill:

Alexander (R-TN), Ayotte (R-NH), Barrasso (R-WY), Boozman (R-AR), Cornyn (R-TX), Crapo (R-ID), Enzi (R-WY), Grassley (R-IA), Hatch (R-UT), Hutchison (R-TX), Johanns (R-NE), McCain (R-AZ), McConnell (R-KY), Moran (R-KS), Risch (R-ID), Roberts (R-KS), Thune (R-SD), Vitter (R-LA), Wicker (R-MS).

And the wall of shame, Republican Senators who voted for the bill both times:

Brown (R-MA), Burr (R-NC), Chambliss (R-GA), Cochran (R-MS), Collins (R-ME), Graham (R-SC), Hoeven (R-ND), Isakson (R-GA), Portman (R-OH), Sessions (R-AL), Shelby (R-AL), Snowe (R-ME).

And now the Senators who got it right all along, voting against the bill both times:

Blunt (R-MO), Cantwell (D-WA), Coats (R-IN), Coburn (R-OK), Corker (R-TN), DeMint (R-SC), Heller (R-NV), Inhofe (R-OK), Johnson (R-WI), Kirk (R-IL), Kyl (R-AZ), Lee (R-UT), Lugar (R-IN), McCaskill (D-MO), Murkowski (R-AK), Murray (D-WA), Paul (R-KY), Rubio (R-FL), Toomey (R-PA).

Congratulations to Senators Maria Cantwell (D-WA), Claire McCaskill (D-MO), and Patty Murray (D-WA) for being the only three Democrat senators to vote against the bill; all three did so on both votes, with Boeing no doubt the overriding factor for the two ladies from Washington State.
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To read another article by Ross Kaminsky, click here.