"Today millions of Americans are out of work because the Chinese are manipulating their currency." US Senator Charles Schumer’s blunt statement has an obvious, seductive logic. If China would let it float freely, its currency would surely appreciate sharply versus the dollar, driving down the prices of US exports to China and elsewhere. US firms would thrive and jobs would be plentiful.
What a happy ending! And hence the growing chorus in the US calling for trade sanctions on Chinese products if Beijing refuses to stop controlling the value of its currency.
But we have been down this road before and what an ugly trip it was. Raising import tariffs on over 20,000 items, the Smoot-Hawley Tariff Act of 1930 also aimed at protecting US jobs. Today, historians and economists agree that Smoot-Hawley merely amplified the Great Depression’s misery, since America’s trading partners retaliated with tariffs of their own, to everyone’s detriment.
The prospects for protectionism are even worse today. Just imagine that the Chinese authorities would agree to let their currency free-float. Yes, China’s exports to the US would grow more expensive for Americans while America’s exports to China would be cheaper. So far, so good.
Now comes the really nasty bit: the US would probably still import much the same amount of goods from China as now, but would simply have to pay a higher price. Why? Because most Chinese exports to the US are simply no longer produced in America. And, just to be clear, the Chinese didn’t "steal" US jobs. Those jobs were already long gone before the Chinese export wave landed on US shores. In this regard, China competes more with Mexico and other emerging markets than with America.
So no big job relief from updating Smoot-Hawley. But the picture grows even uglier if we contemplate what a free-float would mean for US Treasuries. Suddenly, as their relative value plummeted, one of their biggest buyers, China, would probably simply stop buying these securities. They might even opt to sell some of their two trillion US dollar reserves. Given the swelling ocean of US debt issuance thanks to growing government deficits, reduced demand for Treasuries from a primary buyer would put enormous pressure on the price of these bonds while sending interest rates skyward. Not at all a formula for a jobs recovery!
With the US economy still shaky, it could definitely not afford such a development. Echoing Senator Schumer, but with a crucial twist, we would have to say, "Tomorrow millions more Americans might be out of work if the Chinese were to stop manipulating their currency."
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