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US to China: Make Goods More Expensive!

Mises Daily: Monday, September 15, 2003 by

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There is, it seems, a segment of the American population that firmly believes China to be the greatest economic threat facing our country. As if domestic taxation, regulation and deficit spending were of negligible effect upon America's economic well being, dealing with the threat from the Far East now ranks as our nation's #1 priority. This animus towards the Chinese has taken form in a number of disagreements between the respective countries' governments in addition to a well-organized campaign to convince the public that China's increasing dominance threatens America's prosperity.

The latest economic battle between the two countries concerns the U.S. federal government's displeasure with China's currency, the Yuan or Renminbi, being pegged to the U.S. dollar. Treasury Secretary John Snow's visit to Beijing earlier this month boosted the hope of many furious at the Chinese for what they see as an artificially cheap Yuan. Snow's subtle admonitions that the Chinese float, or at the least widen the band within which their currency can float, went largely unheeded.  

Back in America, companies have been lobbying for just the type of proactive stance on China that the current administration has taken. According to The Journal of Commerce, "(George) Jones (President of Seaman Paper Co.) alleges that China is deliberately and unfairly keeping the exchange rate of its currency, the renminbbi, at 40 percent below its true market value." Mr. Jones apparently possesses some type of economic omniscience lacking in the rest of the general public.

Stalwart protectionist Pat Buchanan recently lamented the "Death of Manufacturing" in America. The cause of death, coincidentally, is trade and China's cheap Yuan. "The U.S.-China relationship cannot truly be described as trade. It is rather the looting of America by China and its corporate collaborators in the United States," writes Buchanan. I'm not sure about Mr. Buchanan, but I'm positive that when I purchase a product made in China, it's trade. It is, perhaps, not the trade Mr. Buchanan would like to see take place, but it is a trade nonetheless.

The cheap Yuan, it is increasingly alleged, is the impetus behind the recent downturn in the American manufacturing sector. President Bush, for his part, seems to agree. He used his recent Labor Day speech to announce the creation of a new position within the Department of Commerce designed specifically to deal with the hemorrhaging of jobs within the manufacturing sector. "We have a responsibility that when somebody hurts, government has got to move," promised the President.  That "movement" the President speaks of includes not only direct pressure on China, but also the attempt to convince other countries of the harm the cheap Yuan is wreaking on their economies.

What opponents of economic China have in common, at least in their rhetoric, is the idea of a level playing field in trade being established to make trade both free and fair. It is as if, many argue, a trade between two individuals does not occur so long as a government heavily protects or provides unfair advantages to one of the individuals. The issue of level playing field, however, is at best a cover for further trade restrictions by domestic governments. The common argument goes something like this: "They won't play fair, so we must take steps to protect our interests. Of course we'd like to drop our tariffs, subsidies, etc, but until they do, we must maintain ours." (Emphasis added.) This, of course, leads to a circular argument in which one side presses the other to take that first step.

Most assuredly, the world economy would function more efficiently if all trading partners lifted all trade and commerce restrictions. Capital would flow to its most valued use, while goods and services would cross borders unimpeded. Fortunately, one country can continue to maintain free trade on all imports and exports, all the while successfully trading with a closed, or relatively closed economy.

In the case of the Chinese, while their government's cheap Yuan policy benefits those in the business of exporting goods, it most certainly harms those in the business of bringing in goods and capital from outside China. A cheap Yuan keeps foreign products expensive. This, however, ultimately hurts the Chinese, not the American economy. Those in America attempting to compete with the Chinese in the same markets will find themselves at a disadvantage, but try telling those standing at the checkout line with cheaper, better products made in China that they are worse off for it. In fact the history of the United States, one of the freest economies in the world, has been to trade with less open economies. If we were to trade only with those who matched our level of trade restrictions, all imported goods would come from, say, England and Canada.

Also pervasive in the recent debate over freely floating vs. pegged currencies is the idea that a floating currency is somehow a free-market currency. "We expect our trading partners to treat our people fairly - our producers and workers and farmers and manufacturers - and we don't think we're being treated fairly when a currency is controlled by the government," said President Bush in an interview with CNBC. "We believe the currency ought to be controlled by the market."(Emphasis added) It apparently eludes President Bush and others who support the floating currency on free-market grounds that currency created by government fiat can never be free market, no matter what scheme is devised for its trading on the world market.

In the end, the latest skirmish with China is not about free trade. Nor is it about fair trade. The pressure by the U.S. government for China to float its currency will last only as long as it favors politically influential interests. Back when the pegged currency was deemed to provide the only bastion of stability during the Asian crisis, and hence, a stable economy for which to sell American goods, no one cared a whit about establishing a "free market" for the Chinese Yuan. While no one is ever safe so long as Congress is in session and 1600 Pennsylvania Avenue is occupied, this administration's policy, more so than any other in recent history, has been "buy here, sell elsewhere."

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Jude Blanchette, a recent graduate of Loyola College, writes from Vermont. He can be reached at  jblanchette1@hotmail.com. See other articles by him.