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Peter Morici's Currency Conversion Tax to End Mercantilism
Howard Richman, 2/3/2010

There are several proposals on the table which would end the destructive mercantilist attacks that are de-industrializing the U.S. economy. If one of these proposals were adopted by the U.S. government, China and the other mercantilists would have to buy American products with the money they earned from imports, instead of just using that money to buy American assets.

One of the most innovative of these proposals is the currency conversion tax proposed by U. of Maryland economist Peter Morici, former chief economist at the USTR. Here is how he described his proposal in Congressional testimony before the House Committee on Foreign Affairs on March 12, 2009:

Simply, the United States should give China the opportunity, with a hard deadline, to manage down its trade surplus with the United States, either through meaningful and complete currency revaluation—complete means raising the dollar value for the yuan to a level that reduces China’s trade surplus with the United States by one third each year and to zero after three—or through other domestic means of Beijing’s choosing.

If China declines, the United States should simply tax dollar-yuan conversion in proportion to its official and surrogate currency market interventions. The United States should impose a tax equal to the quarterly value of China’s intervention divided by its exports of goods and services. China would then have a strong incentive to reduce and then stop intervening.

If China does not reduce and eliminate intervention and chooses for the United States to tax currency conversion, then the benefits from a revalued yuan of higher prices for Chinese imports that should go to Chinese businesses would instead go into the U.S. Treasury. If China reduces and then eliminates one-way intervention and lets its currency rise to a value that balances trade, Chinese businesses would capture those benefits in the form of higher dollar prices for their goods.

Comment by Josh, 3/31/2010:

What prevents them from taking dollar denominated assets and switching them to another currency such as the Euro and then cashing them in?