Politics & Policy

Romney Sees Red

Mitt Romney released a jobs plan, which put him a step ahead of the current president, and it is mostly unremarkable — except for his promise to risk a trade war with China, a remarkably bad idea. In truth, it is an idea sufficient wrongheaded that it has been endorsed both by Donald Trump and by Paul Krugman, whose policy prescriptions on China Mr. Romney seems to have adopted tooth to tail.

If elected president, Mr. Romney promises, he will, on his first day in office, issue an executive order that “directs the Department of the Treasury to list China as a currency manipulator in its biannual report and directs the Department of Commerce to assess countervailing duties on Chinese imports if China does not quickly move to float its currency.” Perhaps the first day in office is not the right time to make such a decision, and perhaps Congress ought to be consulted.

In the current world economic environment, for the United States to sanction a country for manipulating its currency is like writing speeding tickets at the Indy 500 — worse, it’s like having Mario Andretti issue the citations. Every major economic power in the world is currently engaged in currency manipulation; we call it monetary policy. The Europeans, the Japanese, and the Chinese are engaged in competitive devaluation of their currencies with an eye toward boosting exports. The United States is devaluing its currency as well — that is a large part of what “quantitative easing” is all about — but more with an eye toward spurring domestic consumption than toward boosting exports.

China is, to be sure, a particularly brazen and impenitent currency manipulator. The renminbi is probably undervalued by at least 15 percent, though estimates vary greatly. China keeps its currency artificially weak to keep employment high in its export-driven economy. Another way of saying this is that China keeps the standard of living artificially low for its workers in order to prevent unemployment, and Mr. Romney promises to retaliate by lowering the standard of living of U.S. workers by raising the prices they pay for imported goods. Beijing’s long-term strategy is to allow the renminbi to rise, gradually, over a long period of time, as China makes the transition from being a poor exporter to a higher-wage economy more driven by internal demand. In the meantime, the United States receives a subsidy from China in the form of lower prices for consumer goods made there. This is a boon for American consumers and a burden for American firms that compete with Chinese firms in the world export markets.

What is seldom properly appreciated is that U.S. exporters do not compete very much with Chinese exporters in overseas markets. It is not as though a 20 percent appreciation in the renminbi is going to make the United States competitive in the business of assembling cheap sneakers. American exports tend to be either very high-tech goods, such as Boeing jets and Apple electronic designs, or very low-tech products such as metals, cotton, tobacco. China’s main exports to the United States are electronics, household goods, and toys. U.S. exports to China are led by semiconductors, aircraft, and soybeans. For high-end manufactured goods, Germany is a much tougher competitor than is China, while Canada is a leading producer of agricultural goods and mineral wealth, being among other things the largest supplier of the imported oil that accounts for more than half of our trade deficit. In those overseas markets where U.S. firms are locked in competition with China — for example, in the computer and electronics market in India — internal controls, duties, and other market distortions are more powerful factors than China’s currency devaluation.

China does not run much of a trade surplus with the world at large — it runs a very large trade surplus with the United States while it runs trade deficits with many of its most important trading partners. It has recently and for the first time run an overall quarterly trade deficit, which suggests that its currency may not be that radically undervalued.

Imposing punitive duties on Chinese goods will neither enrich the United States nor create employment opportunities for Americans. Threatening to do so is not the most fruitful line of engagement, and a disruption in the world’s most important bilateral economic relationship could prove even costlier for the United States than for China, which, being a brutal police state, probably has the ability to weather short-term economic disruption more easily than does the liberal United States. China is pursuing a monetary policy that Beijing calculates to be in its own interest, which is precisely what is done in Washington, Tokyo, and Brussels. China’s monetary policy, even if predatory, is a minor factor compared with those under the direct control of American government: the domestic tax and regulatory environment, and, even more critical, the failed education system that has been undermining U.S. competitiveness for decades.

Mr. Romney is right to denounce China’s rampant thievery of U.S. intellectual property, its violation of patents and copyrights, and its production of counterfeit goods. But these are a separate matter, largely a police matter to be handled independently of our concerns about China’s currency manipulation. Seizing fake Gucci purses at the border is one thing; attempting to strong-arm China into elevating our economic interests over its own economic interests, at least as Beijing perceives them, is another. Should he be elected president, Mitt Romney will have plenty to do sorting out Washington’s misdemeanors without trying to run monetary policy in Beijing.

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