It’s no secret I’ve been hounding Sens. 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 Reps. 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, Mr. Schumer finally agreed to a television interview last Wednesday. As feisty as ever, the New York senator was resolute that his bill is not protectionist.
Not protectionist? The Schumer-Graham bill threatens a massive 271/2 percent tariff on Chinese imports, the biggest proposed tariff increase since the 1930s. Mr. Schumer claimed the bill is meant merely to force China to revalue its currency, arguing 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 in surplus or deficit, but all transact with a fixed-value common currency.
In the U.S., the 50 states comprise a free-trade zone based on the dollar. Economist Arthur Laffer reminds me New York and Mississippi may incur trade surpluses or deficits with each other but do not change the dollar’s value. This works very well.
By keeping its yuan pegged to the dollar, China chooses to import our monetary system. In the last 10 years, this 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 Mr. Laffer.
Many nations in the Pacific Rim, the Caribbean and South America have dollarized to pursue pro-growth and free-trade relations with the U.S. It has worked in these nations just as in China. It’s a win-win. China gets a growth boost, and tens of millions of Americans get to by low-priced quality goods.
Were the yuan revalued by 271/2 percent, U.S. consumers could face a shocking inflation of roughly the same percent.
Mr. Schumer ridicules this Wal-Mart effect and is unconcerned about the obvious body-blow to American consumer living standards. He also claims both the Treasury and the Federal Reserve support his approach. But a senior Treasury official told me, on deep background, both government bodies are “firmly and unequivocally opposed” to the Schumer-Graham bill.
In fact, last week Alan Greenspan, in a nearly unprecedented step, went to the Hill to persuade Messrs. 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, Mr. Schumer claims to favor free trade, yet opposes the Caribbean-CAFTA agreement now pending before Congress. Rather than currency protectionism, here his beef is the inadequacy of foreign worker standards.
He doesn’t get it. When American consumers buy Caribbean goods, we send dollars to Caribbean nations. Those, dollars invested in local economies, create new jobs and higher wages.
I believe economic freedom and growth depend 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, and prosperity follows.
Tariffs, on the other hand, are tax increases on international transactions. Just as domestic tax hikes would sink the economy, so would tariff increases.
Mr. Schumer uses the floating currencies issue as a smokescreen for his protectionist package against China, just as he uses 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 the United States 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.
Lawrence Kudlow is host of CNBC’s “Kudlow & Company” and is a nationally syndicated columnist.
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