September 28, 2006

September 28, 2006 | Commentary on Asia

Political protectionism threatens U.S.-China dialogue

You can always count on the forces of protectionism to emerge once election season starts. It's a cheap way for politicians to wrap themselves in the flag, even if the policies would harm the nation. One favorite whipping boy for those who believe America is on the decline: China's policy of aligning its currency with ours.

Take the proposal of Sens. Chuck Schumer (D., N.Y.) and Lindsay Graham (R., S.C.) to slap tariffs on Chinese goods if China doesn't revalue its yuan. They have threatened to force a vote on this legislation since February 2005. Later, the two senators visited China and claimed to be happy with Beijing's progress towards reforming its economy. But that was before crass electoral motives crept into the picture; now, they promise to force a vote this week.

The timing of the Schumer-Graham push couldn't be worse. U.S. Treasury Secretary Henry Paulson just returned from a very successful trip last week to China where he met with Chinese President Hu Jintao and Premier Wen Jiabao. The dialogue with President Hu was reportedly so frank that at one point both leaders dismissed their staffs to continue their dialogue in private.

Based on Paulson's visit, the United States proposed, and China agreed to, the creation of the U.S.-China Strategic Economic Dialogue. The dialogue will take place semiannually and focus on the two nations' economic relationship as well as other issues of common concern. It is, in short, an important opportunity for the United States and China to work together where our interests are aligned.

Enter Schumer and Graham, whose protectionist proposal threatens to harm American prosperity and scuttle this opportunity for improving the bilateral relationship. The unconstitutional proposal (revenue bills are required to originate in the House of Representatives) would impose a 27.5 percent tariff on Chinese-made goods if Beijing refuses to let the yuan rise against the dollar.

The bill is firmly founded on economic confusion. While countless pundits and politicians have bemoaned the fall of the U.S. dollar against the Euro in recent years, many of these same people are now calling for a flexible yuan, with the specific intent of weakening the dollar. So which is it? Exchange rates, up or down, haven't hindered our economic growth. Nor have imports. The senators' protectionism makes no sense in a time of high GDP growth, low inflation, low unemployment and rapid job creation. Why yell "Fire!" in the middle of China Lake?

In a Sept. 25 Wall StreetJournal op-ed, Schumer and Graham write, "One of the fundamental tenets of free trade is that currencies should float - or at the very least, move along with market forces." Really? Maybe the senators should tell their state legislatures, so they can quickly create unique currencies for New York and South Carolina. By their reckoning, the absence of state currencies and trade regimes on interstate commerce has deeply retarded economic development in the U.S. for the last two centuries. If only those foolish Founding Fathers had known better, they wouldn't have made trade barriers unconstitutional among the states.

Here are the facts: China is an extremely poor country with a fragile financial system. The senators demand the yuan begins to float, but what will they do if it sinks? Will the Senate fund a China bailout through the IMF if they cause a currency collapse that ripples through Asia? It surely seems, in a time of global prosperity, that jawboning protectionist measures to try and force China into a premature float is a solution looking for a problem.

Do Americans import "heavily" from foreign countries? Yes. Does Manhattan import heavily from other American cities? Yes. And these imports have allowed both sides to benefit. The relative flood of computer technology imports, for example, has given Americans - particularly American children - a technological head start on the rest of the world. This freedom to engage in mutually beneficial trade isn't a problem, it's a right.

There are plenty of legitimate concerns in the Sino-U.S. relationship. There are other mechanisms - such as the World Trade Organization and, now, discussion through the U.S. China Strategic Economic Dialogue - for solving disagreements on the economic front. And other, non-economic concerns are far more troubling: the lack of transparency in China's military growth, her violations of basic non-proliferation obligations and tepid enthusiasm for being a responsible stakeholder in solving international crises in North Korea, Iran, Sudan, and elsewhere.

But let's be clear: American prosperity is intertwined with Chinese prosperity. That is the nature of the global economy. Rather than running around howling about economic bogeymen and adopting policies which threaten our continued competitiveness, American lawmakers need to look closely at how our nations can work together to advance our common interest in driving economic growth worldwide.

Freedom can be a burden when paternalism is such an easy sell. But real leaders should do the heavy lifting by defending free-trade policies that actually work. Just because these are prosperous times doesn't mean American jobs face no threats. The most pernicious ones come from economic isolationists, whose proposals will do much more damage than their rhetoric. The one upside is that protectionist policies tend to be short-lived - because results are still what matter most at the ballot box.

Michael A. Needham is director of the Asian Studies Center and Tim Kane is director of the Center for International Trade and Economics at the Heritage Foundation.

About the Author

Tim Kane, Ph.D. Visiting Fellow
Center for Trade and Economics (CTE)

First appeared in the National Review Online