The Bush administration rightly has resisted the Schumer-Clinton tariff, but it is stoking the protectionist flames by continuing to characterize the Chinese yuan's link to the dollar as "manipulative" and by continuing its misplaced insistence that the yuan is "undervalued" relative to the dollar. As the Times editorial observed, "Pegging a currency to the dollar is perfectly legitimate for a country like China with a fragile banking system and rudimentary capital markets."
The administration continues to send mixed economic signals that encourage the protectionists among us by urging China to break the yuan's link to the dollar.
Artificially strengthening the yuan, however, would require the Chinese to tighten monetary policy and drain liquidity from its economy, which would threaten continued Chinese growth. American policymakers should think long and hard before they start down the slippery slope of slowing the world's fastest-growing economy, especially in light of the economic stupor in which our European trading partners find themselves.
Great leaders don't always draw the best hands to play, but they are the best at playing the hand they are dealt. President Bush, in his final term in office and heading into a midterm election, has an opportunity to be a great leader. It is, therefore, vital that he play his hand skillfully. When it comes to reforms as huge as Social Security, not having to face re-election is a definite hindrance because it lessens his leverage with the Congress. When it comes to stopping a potentially disastrous protectionist tariff, however, he is in a very powerful situation.
A senator from South Carolina, for example, may find it impossible to resist supporting policies, bad as they may be, that give voters the impression they are "protecting" them (in this case the textile industry) from "unfair" practices by our trading partners. A strong president, unencumbered by the necessity of seeking re-election, can compensate for the weak links in his party by using the awesome power of the presidency to stop a stampede into a trade war.
The place to begin is for the president to use whatever stored-up political capital is necessary to get his nomination of Rob Portman confirmed as United States trade representative without yielding to protectionist sentiments. Indiana Democratic Sen. Evan Bayh, who co-sponsors the Schumer-Clinton protectionist tariff, announced that he will try to prevent a Senate floor vote on Portman's nomination. It is imperative that the administration resist the temptation to yield to protectionist demands in exchange for getting its trade representative confirmed.
The administration also would do well to lay down a marker right now where protectionist actions against China are concerned. There will still be time to enact personal retirement accounts in the years ahead if we fail to do so this year. If, however, the Congress is getting itself into a protectionist frenzy, the president won't have the luxury of waiting until next year. He must act swiftly and decisively now to stop the frenzy it in its tracks.