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 Richmans' Trade and Taxes Blog

Needed, a Cross-the-Board Tariff on Imports From China
Raymond Richman, 3/21/2010

In a recent article in Barron’s magazine, Dan Dimicco, CEO of NUCOR Steel, and Peter Navarro, Prof. of  Economics and Public Policy at the University of California at Irvine, have joined a number of prominent public figures, including Nobel-prize winner Prof. Paul Krugman, who are criticizing the Chinese government for keeping the value of its currency low, arguing that it is responsible for our huge trade deficits and world-wide instability. Prof. Krugman proposed a substantial temporary tariff to force China to revalue the Chinese yuan.

They write: "In a world of free trade and floating exchange rates, the U.S.-China trade imbalance couldn't persist. As the U.S. trade deficit rose, the dollar would fall relative to the yuan, U.S. exports to China would rise, imports from China would fall, and trade would rebalance." We do not believe that the historical evidence justifies this conclusion. 

The value of the yuan is not the real cause of our trade deficits nor will revaluing its foreign exchange rate have much if any effect on our trade deficits. As I wrote on this blog a few days ago, “In 1971 the United States under Pres. Nixon imposed a 10 percent surcharge on imports, which was removed when Germany, Japan and other nations raised the dollar value of their currencies. The German and Japanese revaluations hardly interruupted the growth of their trade surpluses. We believe that China would respond as Germany and Japan did following the U.S. action. They appeared to be addressing U.S. concerns but it was an empty gesture. In any case, it had little long-term effect.” We do not need a temporary tariff. We need to impose a uniform tariff on all imports from China, whose rate will rise and fall as the trade deficit increases and falls. ...

China raised the value of the yuan relative to the dollar between July, 2005 and April, 2008 by over 16% from about 8.11 yuan to the dollar to 6.99 yuan to the U.S. dollar. There were those in the Senate who demand action to bring trade into balance. Senators Schumer and Graham called for countervailing tariffs at the time. Despite the revaluation of the yuan, China’s  trade surplus on goods grew even more rapidly than before, reaching $800 billion in 2008. The cause of our trade deficits with China, as with Japan and Germany before her, has more to do with the formal and informal (usually hidden from view) barriers, tariffs, and subsidies used by China and other countries like Japan and Germany that restrict imports from us and subsidize exports to us.

Dimicco and Navarro correctly recognize that China must do more than abandon its exchange rate mechanism in this excellent passage from their commentary:

What the president and his profligate band of Keynesians apparently don't understand is this: No matter how many trillions we borrow from China to throw at the U.S. economy, there can be no long-term recovery without a revitalized U.S. manufacturing base.

MANUFACTURING JOBS BOTH PAY more and create more jobs than service-sector jobs. A strong manufacturing base also spurs the innovation necessary to boost productivity, wage growth, and consumer purchasing power.

Until China abandons its exchange-rate mercantilism, eliminates its export subsidies, tears down its Great Wall of Protectionism and embraces free trade, there can be no American manufacturing renaissance.

But most U.S. and American economists, as we wrote in our book, Trading Away Our Future (Ideal Taxes Assn, 2008), have been aware of Asian mercantilist policies but were blinded by an ideology of free trade from doing anything about them. Our government sent mission after mission to China (and Japan before her) to remonstrate and urge them to liberalize trade. But we did nothing but talk, talk, talk. We always had the power to balance our trade under the rules of the World Trade Organization.

American economists advocated free trade even though there is nothing in economic theory that warrants a unilateral free trade policy; every example of the gains from trade in international trade textbooks ends up with trade being in balance. Balanced trade is like barter. Each country gives up a basket of goods it values less for a basket of goods it values more. Economists  fancied that free market economic forces (a free market that did not exist!) would keep trade between nations in reasonable balance.

Ben Bernanke, while Chairman of the Council of Economic Advisors under George W. Bush, explained that a “global savings glut” caused capital to flow to the U.S. and was largely responsible for the trade deficits. He observed that market forces were having little  or no effect on the trade imbalance. At the recent G-7 and G-20 meetings there was talk(!) about the need to balance trade. There were even resolutions but it was just talk.

President Obama has called for China to let its currency, the renminbi, appreciate against the dollar, arguing that an artificially cheap renminbi increases Chinese exports at the expense of the rest of the world’s economies.  Chinese officials took umbrage against his remarks, arguing that U.S. domestic policies are the real culprit.  It is probably true that a system of freely fluctuating exchange rates would tend to some extent to have an effect on trade balances but, as we’ve argued for years, mercantilist trade practices and domestic fiscal policies are the principal cause of the deficits.

The annual reports of the President and the Council of Economic Advisers took great pride every year in the growth of trade notwithstanding that the growing trade deficits were crippling American industry and causing the loss of millions of good-paying industrial jobs as Dimicco and Navarro note. The $800 billion trade deficit is equivalent to a loss of 8 million jobs. The industrial workers who lost their jobs found jobs but at the cost of wage stagnation and a worsening distribution of income. Prof. Krugman argued that we need to impose a temporary tariff to bring China to its senses and allow the yuan to become more expensive relative to the dollar.

Dimicco and Navarro are less specific about what actions should be taken against Chinese mercantilism. They do, however, criticize the Obama administration for not taking any action whatsoever, writing:

Since taking office, President Obama has twice reneged on his campaign promise to get tough on Chinese mercantilism. However, his recent change in tone may signal that on April 15, the Treasury Department may finally brand China a currency manipulator in its latest biannual review. While this action is long overdue, we have strong doubts the Obama administration has either the courage or the sense to act.

It is our view that any country experiencing chronic large trade deficits owes it to its industrial workers to take strong action. Tariffs should be imposed whenever this occurs and should rise and fall as the trade deficits increase or fall. The stagnation of factory output would end and millions of unemployed workers would find employment if we do what we have to do to end the huge trade imbalances. As the authors write, "Manufacturing jobs pay more and create more jobs than service-sector jobs. A strong manufacturing base also spurs the innovation necessary to boost productivity, wage growth, and consumer purchasing power."

While Dimicco and Navarro recognize the problem, they are not yet advocating any actions that would solve it. The closest they get to it is their last sentence a warning to China: "Abandon its mercantilist and protectionist ways -- or be engulfed in a trade war largely of its own making." That we totally agree with.