Politics & Policy

Some Link, Others Manipulate

Why are our protectionist senators singling out China?

Maybe it has nothing to do with trade or currencies at all. Maybe it has to do with China.

The Chinese of course have fixed their yuan to the U.S. dollar, for some time now. In doing so, the Chinese mitigate currency speculation against the yuan in world markets. Meanwhile, the U.S. consumer benefits as imports from China are priced competitively and domestic price inflation remains low.

Sounds like a good deal, doesn’t it?

Well, some of our U.S. senators are accusing the Chinese of currency “manipulation,” based solely on the yuan’s linkage to the dollar. In testimony before the Senate on April 23, Federal Reserve chairman Alan Greenspan warned against the 27.5 percent tariff on China that is being proposed by two U.S. senators, Lindsey Graham of South Carolina and Chuck Schumer of New York. The primary purpose of this tariff would be to force China to de-link, or float, the yuan. The senators expect that the yuan would then rise in value and therefore remove the advantage that the Chinese have when competing with the production of U.S.-made goods and services.

Republican senator Jim Bunning of Kentucky — a strong ally of Graham and Schumer in this matter — told Greenspan that “if you don’t do something to get the Chinese to float their currency, [the Senate] will be forced to do so.”

One would think that the Chinese were doing something illegal. But in reality, many countries do exactly what the Chinese are doing, and yet Congress could care less about these other currency “manipulators.” In fact, in targeting China alone, one wonders if some members of Congress strictly have a beef with China.

You know, we really have a strange sense of fairness and equality when it comes to international relations. For example, when we give goods and services to other countries, we call it foreign aid. But when someone gives us something for a low price we call it dumping. Some of the gray beards in Congress appear offended by China — a burgeoning economy that is helping finance rising standards of living in America. According to Eduardo Porter in a New York Times article, China is paying for “America’s spending binge — for the ballooning credit card bills, the scramble for homes, and the country’s gaping budgetary hole.”

Don’t get me wrong — the Chinese government still suppresses many basic freedoms, while its society permits, if not encourages, the theft of intellectual rights. But these are separate issues.

Various politicians seem to single out different groups for specialized economic treatment, and many times that treatment violates U.S. law. For example, take the OPEC nations. For years, oil exporting countries have conspired to fix prices through the manipulation of global oil supply. This antitrust action is ignored by Congress, all while American consumers continue to get ripped off by the price-fixing mechanism. When was the last time politicians questioned this antitrust behavior? Any mention of tariffs against Saudi Arabia?

At the same time it is not unlawful to fix a currency to another currency or to a real asset such as gold. Britain and the U.S. fixed their currencies to gold for many years with no accusations of currency manipulation coming from Congress. As a matter of fact, there was a huge uproar when President Nixon took the U.S. off the gold standard in 1971. Of course, back then, maintaining a stable currency value was seen as a good thing and not manipulation. Like I said, we have a weird sense of fairness. It seems to be determined by whether we’re managing our currency, or someone else is managing their currency.

Then there is the rest of the world. Have either Schumer or Graham complained about the raft of countries that fix their currencies to the dollar? Not that I have heard. It’s as if these senators have invited the other “manipulators” to sit in the front of the bus, while telling the Chinese to take a seat in the back.

Larry Kudlow hit the nail on the head when he said:

Any efforts to destabilize China are misguided and harmful in economic and national security terms. The freedom to trade has enormously benefited China, the U.S., and the rest of the world’s growth.

Why oh why is dollar-linkage okay for some and not for others? Our senators need to take a good look in the mirror and answer this question straight out.

– Thomas E. Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc. and principal of Victoria Capital Management, Inc.


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