It’s no secret that I’ve been hounding senators Chuck Schumer and Lindsey Graham over their China-bashing trade legislation. How could a supply-sider do otherwise? This protectionist duo should be compared to the late congressmen Smoot and Hawley, as their bill echoes the catastrophic tariff legislation that set off the stock market crash and Great Depression of decades ago.
After many invitations, Sen. Schumer finally agreed to a television interview last Wednesday. As feisty as ever, the senator from New York was resolute in his position that his bill is not protectionist.
Not protectionist? The Schumer-Graham bill threatens a massive 27.5 percent tariff on Chinese imports, the biggest tariff-hike proposal since the 1930s. Schumer claimed the bill is merely designed to force China to revalue its yuan currency, arguing that world free trade requires floating exchange rates.
I disagree.
There are numerous examples of successful free-trade zones based on a common currency. The 12-nation European Union is a free-trade zone based on a fixed exchange rate for the euro. Individual countries may have trade balances that are in surplus or deficit, but they all transact with a common currency with a fixed value.
In the U.S., the 50 states comprise a free-trade zone based on the dollar. Economist Arthur Laffer reminds me that New York and Mississippi may incur trade surpluses or deficits with each other, but they do not change the value of the dollar. This works very well.
By keeping its yuan pegged to the dollar, China chooses to import our monetary system. Over the past ten years this arrangement has generated 10 percent growth and low inflation in China, while creating more jobs and higher living standards for hundreds of millions of heretofore impoverished Chinese.
As China does not yet have a proper banking system or a reliably independent currency, it has had to pay dearly to import our monetary system and currency: The Chinese have purchased $230 billion of U.S. Treasuries as the price of renting dollarization. In return, we have “outsourced Alan Greenspan” to manage their economy, to paraphrase Laffer.
Many nations in the Pacific Rim, the Caribbean, and South America have dollarized in order to pursue pro-growth and free-trade relations with the U.S. It’s worked in these nations just as it has in China. It’s a win-win. While China gets a growth boost, tens of millions of Americans get to purchase quality goods at low prices. If the yuan were revalued by 27.5 percent, American consumers could face a shocking inflation wave of roughly the same 27.5 percent.
Schumer ridicules this Wal-Mart effect, and is unconcerned about the obvious body-blow to American consumer living standards. He also claims that both the Treasury and the Federal Reserve support his approach. But a senior Treasury official told me, on deep background, that both government bodies are “firmly and unequivocally opposed” to the Schumer-Graham bill. In fact, last week Alan Greenspan took the nearly unprecedented step of traveling to the Hill to persuade Schumer and Graham to postpone another vote on China tariffs.
The Fed chairman is concerned about Chinese retaliation, and he’s in good company. Investment manager Gene Henssler fears a massive Chinese sell-off of American bonds, one that could abruptly cause U.S. interest rates to spike upward and throw the economy downward. American Enterprise Institute scholar James Glassman believes the stock market would crash. Foreign policy analysts fear a major break in Sino-U.S. relations over Taiwan and North Korea.
Oddly, Schumer claims to be for free trade, and yet he opposes the Caribbean-CAFTA agreement now pending before Congress. Rather than currency protectionism, here his beef is that foreign worker standards are inadequate. He doesn’t get it. When American consumers purchase Caribbean goods, we send dollars to Caribbean nations. Those dollars are then invested in local economies, creating new jobs and higher wages.
I believe economic freedom and growth depends on free trade among nations and individuals in market-based economies. Take away free trade, as Smoot-Hawley did in the 1930s, and depression results. Restore free trade, as presidents Truman through George W. Bush generally have done, and prosperity follows.
Tariffs, on the other hand, are tax hikes on international transactions. Just as domestic tax hikes would sink the economy, so would tariff hikes.
Schumer is using the issue of floating currencies as a smokescreen for his protectionist package against China, just as he’s using worker standards to oppose CAFTA. In both cases he has adopted the new anti-free-trade Democratic party line. But on China and Caribbean trade, the real issue is whether or not the U.S. will be a world leader in promoting political and economic freedom, market-based capitalism, and global prosperity. Free trade is essential to this. It is not only the best course for our own nation and security, but the surest path for the rest of the world.
— Larry Kudlow, NRO’s Economics Editor, is host of CNBC’s Kudlow & Company and author of the daily web blog, Kudlow’s Money Politic$.