Yesterday we explored how currency manipulation works, today we’ll be looking at tariffs briefly before examining why the currency bill isn’t going to change China.
Tariffs:
When we talk about imposing tariffs on Chinese goods, it sounds like a great way to promote the American economy. Lawmakers argue that these tariffs will force China to revalue its currency, help create jobs in the US, and hopefully force China to open its markets to American products (although this chart from The Economist suggests otherwise). It sounds like a miracle solution to America’s economic problems. But what if we called it a 10-20% tax on everything imported from China?
As Tim Harford explains in his book “The Undercover Economist
Let’s say China is selling us socks, and we are selling China cars. Then we impose a 20% tariff on socks from China, which means that consumers would respond by buying roughly 20% fewer socks from China (maybe they buy the slightly nicer American socks, or find a Bangladeshi pair, or we get to start using the verb “to darn” again). Since that 20% price increase is being imposed by the US gov’t, the Chinese factory owner doesn’t benefit from it in anyway, and his earnings decline by 20%. Now instead of being able to buy the American car he wanted, he opts to buy a cheaper Chinese brand.
In that situation who wins? American consumers don’t really benefit, American factories might benefit slightly, Chinese factory workers and factory owners end up with fewer jobs and lower earnings, and American car companies don’t end up selling any more cars. Tariffs also ignore the fact that a large number of “made in China” products actually provide a larger stream of cash to American companies than to their Chinese manufacturers (report).
The Bill Won’t Work
The other major factor that the Senate seems to be ignoring is that when it comes to international trade and currency policy, China has the attitude of a stubborn 2 year old. When the US threatened to label China as a manipulator in 2010, China’s firm response was “nu-uhhh”. China maintained it’s fixed RMB policy until a week before the report was due, which then allowed the US to say that China was not a currency manipulator. Since then China’ s currency has been slowly appreciating (there is a limit on how much the value can change in a single day).
Chinese RMB vs. US Dollar, starting slightly before US threatened to label China a currency manipulator. The ruling that China did not manipulate it's currency came just a few days after the currency began rising.
Other trade issues have resulted in similar reactions. When Obama introduced a tariff on Chinese tires, China responded with a tariff on American chicken feet (or chicken paws as they are known in the business). This spat has been far harder on poultry companies in the US than on Chinese tire makers. While China can always sell tires to other countries, it turns out there is no alternative market for chicken feet that can absorb the quantity China does (they end up as fertilizer or pet food now instead of a dim sum treat). Learn more about this story from Planet Money
China often responds tit for tat when it comes to trade, and uses trade in political disputes too (like with Japan and Norway). China has also made it clear through numerous policies that it will do whatever it takes to support Chinese businesses over foreign ones (a comparison of Apple product prices in the US and China). When these issues are brought before the WTO, and even after the WTO rules against China, the gov’t is very resistant to making the changes.
I think an important factor in China’s reactions is its desire to appear strong on the world stage in disagreements with the US, and Chinese nationalists openly criticize the Party for being weak when they bow to foreign pressure (the same is true for American politicians). This has driven a number of stories that now seem to be accepted as fact by my Chinese friends; that the US intentionally pushed Japan’s Yen lower to cause it’s economic faltering, or that George Soros sold off a large amount of Asian currency to cause the wider economic slow down in the 90’s. So in spite of arguments that many Chinese could benefit from a stronger currency, and that the policy is likely a factor in China’s growing inflation concerns (due to the massive amount of RMB created to keep the price pegged to the USD), the Chinese people remain strongly opposed to any policy changes.
As for the US side, I think passing this bill will result in far fewer benefits than simply threatening China with this kind of legislation (which has been somewhat effective in the past). If the US were to back down, the Party could claim victory, and then resume the appreciation of the RMB. It is important to keep in mind a trade war is in no one’s interest, but I think China would have much more of a stomach for the setbacks it would cause than the US population. Sadly, it seems that this bill is the result more of politics than economics.
Hit the nail right on the head. Any legislation like this just backs the Chinese gov into the corner and leaves them no choice but to prove they’re not supplicant to the US. But now those who voted for it can point to those who didn’t in next year’s election and say they’re weak on China and favor sending American jobs there. And it will work.
I watched another Republican presidential debate last night. Candidate Romney still stands firm on playing hardball with China in regard to the currency issue, and has repeatedly labeled the Chinese “cheaters.” This confrontational approach makes it appear that he is a graduate of the Donald Trump School of Economics. Candidate Jon Huntsman, former US Ambassador to China, disagrees with Romney. Huntsman suggests a less direct approach, i.e., discussions/negotiations to find common ground between the two countries, and proceeding from there. This makes sense to me.
I agree that the crafting of this bill appears to be for the scoring of political points. Some powers-that-be believe that this confrontational approach is what the American people crave.
RMB appreciation equals US debt depreciation, which is a good thing.
I think it would be very positive for the American people to lead their own buy american shift in ideology. There is no reason to buy things from China that we can produce well over here, while providing jobs and usually better quality workmanship. But the lead for this kind of thing should come from the private sector and private citizens, not the government, as to avoid name-calling.
This is an interesting idea, but I actually think that China’s poor quality manufacturing has helped US companies realize the value of skilled labor. Also the actual factory part of creating products is the lowest value step in the process. If you read the report I linked to in the article you would see that when Apple sells an Ipad they are getting a lot more of the profit than Foxxcon.
One thing China’s really serious about is money. Maybe when their profits are put under threat that’ll incite them to cooperate.Or, since the US is what? 20% or more of China’s trade? Maybe China will try to pimp its goods elsewhere. China is scared and I think that’s what the point of the US bill is. The US has been threatening this for so long that they finally had to follow through with it.
To be honest, China is in a way cheating. If you look at the stories coming out of china, polluted food, gutter oil, underage labor in factories you pretty much know that labor in the USA can simply not compete with labor in China, at least concerning mass produced items. Environmental and labor protections laws are simply not the same, and impose bigger costs on employers in the US compared. That’s pretty much ‘cheating’ imo. Don’t forget the cases where foreign companies get the shaft in alot of business deals, and in contact with the government.
That is correct. There a huge number of ways that China is giving its businesses advantages, subsidized raw materials, lax environmental standards tax free land. I don’t think that even a 20% import tax on Chinese goods would be enough to completely offset these cheats. At the same time I don’t think the solution is legislation and tariffs, it would be far better to go with a group of countries to the WTO, so that this cannot be construed as unilateral pressure.
There is wide consensus in just about every corner except Zhong Nan Hai that the RMB is overvalued and there is very little defense to that. Has China provided one good reason as to why it is not overvalued when it has to absorb 20 to 40 billion of foreign exchange monthly? So the issue is how much this has contributed to US ills or is the US just blaming China for its economic woes? I don’t know that any reasonable person would say that China’s over valued RMB, its subsidies of cheap power and capital, or its uneven treatment of foreign products is 100% to blame for the US’ woes. The US problem is far deeper than that. But that does not excuse China’s mercantilism or argue against an attempt to try to force an issue that we have been talking to China about for years, almost a decade now.
Here is the issue that drives the US crazy. Right now, the world has a demand problem. Not enough demand to take all the capacity (China has irrationally continued to add capacity since the 2008 meltdown in steel, aluminum, cement, chemicals, shipping, and many other industries). Both the US consumer and European peripheral sovereigns need to deleverage (reduce debt). The US consumer has been doing this since 2008. In order to avert a pending loss of demand as a result of consumer deleveraging, the US government stepped in with the fiscal stimulus. That of course added to the deficit but also supported demand to keep sales up and people employed.
But to the extent the US continues to run a trade deficit, some of that demand is sent overseas and satisfied by employees and firms in other countries. So if you are a tax payer in the US, you see your tax dollars (or future tax dollars) being spent to benefit firms overseas. That’s really the political issue. If everyone were trading fairly as per the real intent of the WTO, then there would not be such a complaint.
Will the bill in Congress help? Not really. So it is polictical in that respect. I would councur that negotiation and actions through the WTO would be preferred. But we have been talking to China for almost a decade about this issue.
China will do as China wants.
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