As if it weren’t bad enough that President Obama has been lifting his economic policies from Franklin D. Roosevelt. On Monday, the Senate voted 79-19 to advance debate on legislation that would re-create the very mistake the 1930s Congress made with the Smoot-Hawley protectionist tariffs.
This time, it’s called the Currency Exchange Rate Oversight Act, a measure that would spark the same sort of trade war that once hurled a weak economy into the depths of the Great Depression. The proposal would grant the Obama administration the authority to declare that a certain country has a “fundamentally misaligned currency” so that new tariffs could be slapped on its goods. Once a nation is so designated, federal agencies would be barred from buying its goods and services.
It’s nothing less than a direct assault on trade with China, the one major player in the global marketplace without a free exchange rate, which allows Beijing to lock in a low value for its currency. The Middle Kingdom has accumulated as much as $3 trillion in reserves and a $270 billion trade surplus from its commerce with the United States. Sen. Charles E. Schumer, New York Democrat, summed up the mood of anti-trade factions by saying there “is nothing we can do to create jobs better than by correcting China’s trade imbalance.” It may be convenient to pin the blame for our economic woes on a faraway land, but acting on such rhetoric risks doing grave harm to our economy.
We live in a global, multilateral world, especially regarding financial affairs. It is inevitable that we will run trade deficits with some countries and surpluses with others. The flip side of a trade deficit is a capital surplus. The accumulation of reserves by the Chinese has enabled American interest rates to remain low and kept the cost of servicing our ever-increasing federal debt that much lower.
The high U.S. unemployment rate has very little to do with China’s currency policy and a lot to do with domestic policies that inhibit investment and hiring by private businesses. Reducing uncertainty at home and allowing private enterprise to flourish would be the better path to restoring job growth. Mr. Obama finally has sent Congress the three long-pending free-trade agreements with South Korea, Colombia and Panama. Passing those will do far more for creating jobs than this disastrous bill, which quite likely is noncompliant with our treaty obligations to the World Trade Organization.
Ultimately, China’s mercantilist policies hurt the Chinese people the most, not Americans. Keeping the value of the yuan artificially low (though it has appreciated in real terms about 10 percent this year) makes goods that much cheaper for Americans and more expensive for Chinese consumers. There is an income effect to this, which analysts all too often ignore. China would be better off with a flexible exchange rate and fewer capital controls, as would its trading partners. Engaging China to move along this path would leave everyone better off. Slapping on tariffs and ending up in a trade war will leave everyone worse off. The Senate ought not to repeat the mistakes of the past.
Nita Ghei is a contributing Opinion writer for The Washington Times.