Substituting Policy for Politics

by Douglas Holtz-Eakin

The Senate is being tied up by Sen. Charles Schumer’s (D., N.Y.) currency bill — S. 1619, otherwise known as the Currency Exchange Oversight Reform Act. It would have the United States act unilaterally to punish China for fixing its currency at an artificially low rate. I believe this is a facile, politically clumsy way to address a situation that deserves a real solution.

There’s no dispute that the Chinese are keeping the value of the yuan artificially low, and that this has had an impact on our manufacturing sector. However, much of the impact has fallen not on U.S. businesses but on the manufacturing concerns located in other Asian countries such as Taiwan, Thailand, and Indonesia, which are in reality the keenest competitors of the Chinese manufacturing sector. Also, Western Europe has also seen a low yuan result in higher Chinese imports than would otherwise be the case.

Given that we are not the only country feeling the impact of this policy, it makes sense to enlist these other countries and engage in some sort of multilateral action to address the current situation. Sen. Orrin Hatch (R., Utah) has proposed to do precisely this, with an amendment to the bill that would help create the environment to craft a multilateral response to the issue.

I’ve advocated before that we consider some sort of “League of Democracies” for dealing with issues such as these. The United Nations and WTO are often effectively held hostage by recalcitrant autocracies, resulting in very little getting done — witness the interminable Doha round continuing to languish and the mockery that is the United Nations Human Rights Council.

I realize that such an entity is highly unlikely to get off the ground; still, it would be great if our president could avoid what may eventually be a politically ugly confrontation by being a leader, talking to our friends in the EU, in Asia, and elsewhere, and suggesting we approach China with a unified front. In that guise we could invite them to allow a more realistic valuation of their currency, and do so in a way that gives them something as well, so that it comes off as being something other than a confrontational demand that its leaders would have no option but to reject.

It is a more complex solution to the problem, and not nearly as sexy or slogan-inspiring as the Currency Exchange Oversight Reform Act, but it also happens to have a much greater likelihood of being effectual. But that, I suspect, was never Senator Schumer’s intent.

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