The week began with Steven Pearlstein of the Washington Post taking a forceful position against China's currency policies, in an article entitled "Forget Revaluation. Hit China With Tariffs." The title makes his position pretty clear, but he elaborated as follows:
The American challenge is to slow the growth of a China trade that has become dangerously unbalanced. And now that China has made it clear that it cannot take the one step that would restore some balance -- revalue its currency -- our course is clear. Many of the same effects of a revaluation can be achieved through an across-the-board tariff on Chinese imports that would disappear as the yuan rises to "market" levels.
The world would not end, the global trading system would not collapse. Legal challenges would be filed, contracts canceled and China might impose retaliatory tariffs of its own. Chinese exports to the United States would slow, the U.S. trade deficit would moderate.
At some point, however, China would tire of an arrangement that required it to live with the disadvantages of revaluation (less export growth) without the benefits (a stronger currency that can buy more imports). And that would be a good time for some future treasury secretary to convene the next session of the U.S.-China strategic dialogue.
Dan Ikenson of the Cato Institute hit back with the following:
Though Pearlstein has grown increasingly hostile to trade recently, Sunday’s column, in which he describes the upside of a massive levy against all Chinese imports, is probably the most irresponsible one I’ve read from him.
The “currency issue” is the most prominent source of contention afflicting the U.S.-China economic relationship. But it is merely a proxy for broader concern over the U.S. trade deficit with China. From the large and growing deficit, many policymakers conclude that we are losing at trade, and we’re losing because China is cheating. Intervention in the currency market by China’s central bank to keep the Yuan artificially low is the chief form of cheating, which acts as a subsidy on exports and a tax on imports. Fix the currency manipulation, and you fix the trade account.
That is an extremely simplistic take on the cause and effect of Chinese intervention in the currency market.
As for policy-makers, they seem to be closer to the Pearlstein side of the argument, although the specifics are still being debated:
The Senate bill is to be introduced in the next month and will mandate the US Treasury to intervene in global markets if currencies become fundamentally "misaligned", people involved in the process said.
...
Congressional aides are drawing up an approach to Beijing that shifts the emphasis to the World Trade Organisation from the International Monetary Fund, which is viewed as having been ineffectual in tackling global imbalances.
A new WTO case proposed in the bill would seek to define China's weak currency as an unfair subsidy and look to the IMF to measure the percentage by which the currency is undervalued. Fred Bergsten, of the International Economic Institute, said that percentage could then be applied to Chinese goods, if the case were successful.
"A ruling that the currency was undervalued by 10 per cent could mean a tariff of 10 per cent on all Chinese exports," Mr Bergsten said. He added that if the US brought the case it was more likely to be resolved through consultations than a WTO ruling.
