It was only a couple of weeks ago that I wrote in this column of the economic dangers posed by threatening to impose a 27.5 percent tariff on all imported Chinese goods unless China severs it currency link to the dollar, which New York Sens. Charles Schumer and Hillary Clinton propose in S. 295. But the dangers are so great and the protectionist fever is running so high among our elected officials (even some Republicans, such as Sen. Lindsey Graham of South Carolina and Mike DeWine of Ohio, have signed onto the Schumer-Clinton tariff) that I feel compelled to speak out against this pernicious idea once again.
Although the New York Times editorial staff and I frequently disagree, on this issue we see eye to eye. The Times editorial page called the Schumer approach "an all-around dreadful strategy" because it is based on "a misunderstanding of both China's financial situation and the cause of American economic woes." Our trade deficit with China is not a consequence of the Chinese currency, the yuan, being undervalued.
Last week, my friend and co-chairman of the Free Enterprise Fund, Larry Kudlow, made similar points, putting the question succinctly and starkly when he asked in his column why the United States threatens economic warfare against China by signaling, as the Senate did three weeks ago, a willingness to bludgeon the Chinese with the Schumer-Clinton tariff.
Schumer offered his extortionate tariff on April 6 as an amendment to S. 600, the Foreign Affairs Authorization Act. Senate Republican leaders attempted to kill the amendment with a motion to lay it on the table, i.e., dismiss the amendment, but the motion was defeated 67-33. The Senate has yet to vote on the amendment itself, but the overwhelming vote (of "veto-proof" magnitude) against the tabling motion indicates Schumer's tariff could easily be approved by the Senate with bipartisan support.
Kudlow correctly observed that trade and currency protectionism "blunt economic growth and sour international political relations." He predicted a "geopolitical and economic mess brewing in northeast Asia" as a result. I agree. Protectionist saber-rattling always threatens to touch off a trade war, especially when the objective of the attempted economic extortion puts a trading partner in a double bind as the Schumer-Clinton tariff does: China is being maneuvered into a corner in which it must either destabilize its currency by letting it float or stand by idly while its ex?ports crash up against an insur?mountable American tariff wall. No nation can ignore such a threat to its economic well-being.
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.