Punishing China and Hurting Ourselves

As high unemployment persists in the U.S. and frustration with political leaders rises, citizens across the nation are increasingly calling upon Congress to do something about their precarious economic situation. One such proposal that has passed the Senate is a bill that punishes China for its “manipulation” of currency. The bill was able to garner much bipartisan support, but the sad fact is that it will be completely ineffectual and perhaps even counterproductive.
Proponents of the bill claim that the bill will lead to the creation of millions of new jobs and also close the trade deficit with China by a few hundred billion dollars. Ignoring the implications of international trade law as well as the U.S.’s own currency “manipulation,” this currency bill will be unable to produce new manufacturing and other industrial jobs in the United States and will also unnecessarily damage Sino-U.S. relations.
China manipulates its currency by buying up billions of U.S. dollars on the world currency market and thereby keeping the price of the dollar high relative to the Yuan. It is desirable for China to do this because it allows the country to flood the United States with cheap goods. Without getting too bogged down in the intricate economics of our current situation with China, the bill passed to punish China for its currency manipulation would essentially be a tax on American consumers.Tariffs on Chinese goods would protect U.S. manufacturing and industrial jobs by making Chinese goods more expensive, but the American consumer would definitely feel the pain at the checkout counter.

Some would argue that this outcome of more expensive consumer goods is an adequate price to pay for millions of new jobs; however, the job creation aspect of the bill is not a sure thing. This is because cheap goods from other countries like Vietnam and South Korea would fill the void of Chinese goods and because jobs will be lost if and when China initiates retaliatory measures against U.S. companies.
It is also a well known fact that the U.S. government is currently operating under a massive deficit. China has been one of the principle nations bankrolling this deficit spending, and if the Chinese stopped showing up to U.S. Treasury bond auctions, the government would have to print more money in order to finance all of its spending which would lead to massive levels of inflation that would contribute to the economic woes of the average American citizen. The odds of China taking such a drastic measure are slim, but the possibility significantly weakens America’s bargaining position.
China kept its currency pegged to the U.S. dollar for 10 years from 1995-2005 yet, in every year, the country increased its trade surplus with the United States. This trend clearly illustrates the fact that the trade deficit with China exists because the country is outcompeting the U.S. in some regards and not solely due to them “cheating” through currency manipulation.
For over a century, America has been the leading economic powerhouse and innovator in the world. While it is important to take a stand against unfair trading practices, a critical self-evaluation of what has gone wrong in our own economic policies and our relative leverage in diplomatic negotiations is equally important. Not only will this bill have negative repercussions on American consumers, it is another smokescreen for the root problems plaguing the American economy.
Photo Credit: Top News Singapore