By Steve Cornett
Since last we visited, China's recalcitrance has drawn the attention of editorialists far wiser than I. And, in fact, President Obama, both houses of Congress and China’s top finance officials have weighed in, as well.
You may recall that I was arguing, a bit lamely, one might suggest after watching the likes of Paul Krugman make pretty much the same argument, that it’s time for the U.S. to at least act like it’s going to call China’s bluff over currency valuations.
Krugman, the very liberal, but Nobel Prize-winning, economist who writes for the New York Times and occasionally shows up on that Sunday morning news panel to lose arguments with George Will, seems to agree. Last week, he published a column in which he accused China of maintaining “the most distortionary exchange rate policy any major nation has ever followed."
His column created a lot of buzz, and not just because he used a word my copy of Webster’s Unabridged and I agree should have been “distortive.”
Krugman swings a big enough abacus with the Obama-types to get the attention of anybody with any interest in U.S.-China trade. Within days, a bipartisan bunch of congressmen had asked the Administration to impose tariffs on Chinese imports. Sen. Chuck Schumer (D-NY) and four other senators introduced a bill that would force the Administration to put more pressure on China.
Obama himself suggested China should loosen its monetary policy to help the world economy recover. I’m not accustomed to agreeing with all of the above.
Indeed, the Wall Street Journal editorial board—with whom I agree rather often--worried that there is a trade war budding. They said that “at the core (of the protectionist sentiment) is a basic misunderstanding of monetary policy. There is no free market in currencies, as there is in wheat or bananas. Currencies trade in global markets, but their supply is controlled by a cartel of central banks, which have a monopoly on money creation. The Federal Reserve controls the global supply of dollars and thus has far more influence over the greenback's value than any other single actor.”
The Journal argues that China pegging its currency to the dollar “has served the world economy well, leading to an explosion of trade, cheaper goods for Americans that have raised U.S. living standards, and new prosperity for tens of millions of Chinese.”
My sentiment, exactly. If I learned anything in college economics it’s that we don’t ever want to see the world go Smoot-Hawley again. But it’s not just the yuan I’m talking about. China’s monetary policy is a pressure point our guys should use to force them to open their market to, among other things, U.S. beef. We take their junk by the container load. They should take our beef.
I want that market. That country—the melamine capital of the world, mind you—keeping U.S. beef out on flimsy safety concerns is unacceptable.
But I don’t suppose I’d want a real trade war over it. Smoot-Hawley, you’ll recall, sprang from a worldwide economic slump and is widely blamed for making the Great Depression more depressing. But it’s a chance I’d take to get some reciprocity.
Krugman—and remember, he’s got a Nobel Prize, so you know he’s smart if occasionally misguided—makes the same point I made in our last visit. I said if you owe the banker enough, he’s got to work with you because what hurts you hurts him.
Krugman says “It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.
His fix: “In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10% surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25%.”
That would be quite the shock, indeed. Or, waved around properly, quite the stick. I’m not sure I agree it should be so draconian, but then I often disagree with Dr. Krugman.
I do agree with his final statement: “I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.”
There are 1.3 billion Chinese. U.S. beef needs that market.
--Steve Cornett is editor emeritus at Beef Today. You can reach him via e-mail at email@example.com.
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