Monday, June 27, 2005

If a store is selling quality products at low prices, why would anyone want to shut it down? Economist Arthur Laffer asked this rhetorical question last week in connection with an unprecedented attack on China trade by numerous U.S. senators. The China-bashing sent the stock market plunging.

How fitting such a misguided approach to both the economy and national security comes on the 75th anniversary of the infamous Smoot-Hawley tariff bill. Economist Thomas Sowell says that massive tariff helped trigger the Great Depression, with U.S. unemployment rising from 9 percent in 1930 to 16 percent in 1931 and 25 percent in 1932.

Today, Sens. Charles “Smoot” Schumer, New York Democrat, and Lindsey “Hawley” Graham, South Carolina Republican, have proposed a 271/2 percent tariff on Chinese imports unless China significantly raises its yuan currency’s value.

The senators seem angry at a rising bilateral trade deficit resulting from Chinese imports to the U.S. But so what? Free trade only empowers our consumers. In the last couple of years, the U.S. has created about 3.5 million new jobs, the unemployment rate is only 5.1 percent and the nation’s GDP is expanding by 41/2 percent annually.

Meanwhile, China’s economy continues climbing nearly 10 percent, with the once-impoverished Chinese people slowly but surely entering the modern realm of rising global prosperity.

Messrs. Schumer and Graham believe a higher yuan would narrow the trade deficit. But Alan Greenspan completely disagrees. The Fed chairman told a Senate panel, “Some observers mistakenly believe that a marked increase in the exchange value of the Chinese renminbi [yuan] relative to the U.S. dollar would significantly increase manufacturing activity and jobs in the United States. … I am aware of no credible evidence that supports such a conclusion.”

More, Art Laffer argues a stable yuan linked to the dollar has promoted strong economic growth at low inflation for the United States, China and the rest of the world. “We have outsourced Alan Greenspan to China,” said Mr. Laffer, “and that’s a good thing for everyone.”

Think of the dollar-link as China’s gold standard, stabilizing the value of its currency and attracting foreign investment to rebuild its economy. Destabilizing the yuan would be just as disastrous as the so-called Asian contagion of 1997-98, when Robert Rubin and the International Monetary Fund forced the smaller Asian Tiger economies to delink from the greenback. That only led to recession in the Pacific Rim and intense deflation around the world.

Ironically, since the dollar has floated freely, the dollar-linked yuan has also floated compared to a market basket of currencies. Between 1995 and 2001, the yuan-dollar appreciated nearly 50 percent and in recent years fell about 30 percent. Both the U.S. and China adjusted internally to deflation and inflation. But the common link between the two has given the yuan global financial confidence, while giving the U.S. enormous leverage over the Chinese economy.

What’s wrong with that? We buy their goods, and they invest in our country by purchasing Treasury bonds and more recently by directly investing in large U.S.-based corporations (like Maytag and Unocal).

Unlike sale of defense-related technologies, there’s no national security problem here. American firms like Anheuser-Busch and Bank of America, and numerous tech firms all invest in China. This is free and open trade for the mutual benefit of both nations. Trade and monetary cooperation also provide the basis for national security cooperation, especially on deterring nuclear proliferation in North Korea and protecting a free Taiwan.

Clearly China is not perfect, though it has reduced government ownership of the economy from 90 percent 20 years ago to about 30 percent today, according to Mr. Laffer.

Yes, the communist government in Beijing prevents free elections and free speech, continues persecuting religious groups and has a record of pirating music and software, as well as other intellectual property. But a recent study by the Council on Foreign Relations finds China has also changed 2,600 legal statutes to comply with World Trade Organization rules.

The freedom to trade and the freedom to choose are central to the economic freedom necessary for nations to grow and prosper. Centuries of economic history confirm this, yet some people seem to want to repeat the past’s worst mistakes.

Open trade and currency stability enormously benefit both the United States and China and may well lead to improved international relations. Why do Sens. Smoot Schumer and Hawley Graham want to disrupt the 21st century march to peace and prosperity?

Cutting off your nose to spite your face makes no sense for individuals or for nations. Hasn’t history taught us free trade is part of the solution — not the problem?

Lawrence Kudlow is a nationally syndicated columnist.

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