The Bush administration, without doubt, has put in place the best tax and economic policies since Ronald Reagan left office. When it comes to trade policy, however, the congressional pressures on the White House have had the unfortunate result of allowing political considerations to crowd out sound economic policy. And even more unfortunately, the pressure is coming from Republican members who should know better.
The administration is allowing itself to fall prey to the political temptation to placate the squeaky protectionist wheels on textile imports from China. What is doubly worrisome about this protectionist impulse, however, is that it has slipped the bounds of simply responding to political pressure by intense special interests for protection against international competition.
True, the administration recently slapped import quotas on a wide range of Chinese textile imports, which, in themselves, are harmful. The case the Treasury Department is making for protectionist policies against China, however, is being based largely on more general principles seeking more far-reaching actions than simply hiking tariffs and instituting quotas.
Unfortunately, these principles are really an array of old economic fallacies regarding balance-of-trade flows, monetary policy and foreign exchange practices, which could do much more damage than simple quotas and tariffs. Basing protectionist policy on these principles could make it much more difficult for the administration to extricate itself and the country from the destructive policies it contemplates. The administration is applying relentless pressure on China to manipulate its currency, increase the value of the yuan relative to the dollar and, consequently, to slow economic growth and restrict its exports. If they succeed, it very well might encourage currency wars in the global economy.