The good news is that Senators Lindsey Graham and Charles Schumer have
started to inch away from their misguided attempt to club China for its currency
policies.
At the end of a fact-finding trip last week, Mr. Schumer told reporters he
was no longer sure he would push for a vote to impose tariffs on Chinese imports
into the United States. "The jury is out," he said. But, he said, "we are more
optimistic that this can be worked out than we were in the past."
Maybe the chance to talk face-to-face with Chinese on their home turf is what
it took to make Mr. Graham and Mr. Schumer realize that just as trade is a
two-way street, so too are sanctions.
If lawmakers actually went ahead with the Schumer-Graham bill, which would
impose 27.5 percent tariffs — a staggering amount — on Chinese goods, they would
be accomplishing little to cut American unemployment, while hurting poor
Americans who rely on inexpensive goods and poor Chinese whose livelihoods
depend on making those products.
The Schumer-Graham bill is based on a fundamental misunderstanding of the
root cause of America's economic problems. No question, the United States trade
deficit and the loss of American manufacturing jobs are very serious.
But most of the imbalance with China is caused by Americans' insatiable
appetite for Chinese imports for which there are few domestic substitutes. While
it's unfortunate that the textile industry has all but faded away in this
country, the fact is that few American factories make things like low-priced
apparel any longer.
As for the yuan, China clearly needs a more flexible currency, both for the
sake of trade relations and to gain more control over its economy. But moving
the yuan could cause pain in the United States. America's lack of savings is the
biggest contributor to global imbalances, making it necessary to "import"
billions of dollars of foreign capital daily to cover budget and trade deficits.
China is America's second-most-important lender, after Japan.
As long as China links the yuan to the dollar, it needs to keep the American
currency stable. If China loosened its currency's peg to the dollar, or removed
it altogether, it wouldn't need to buy up dollar-based assets at its current
torrid pace. The result could be a rise, even a sharp rise, in United States
interest rates and, as a corollary, a fall-off in economic growth.
Thus far the Bush administration has resisted calls to accuse China of
currency manipulation, but Treasury Secretary John Snow last month hinted that
could change. That too, would be a mistake. The administration has done a fair
job so far in its tap dance around America's relationship with the world's
fastest-growing economy. Now is not the time to slide back into election-year
shortsightedness.