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 Richmans' Trade and Taxes Blog

China riggles off the hook
Howard Richman, 6/22/2010

Yesterday the Chinese government let the yuan strengthen 0.4% vs. the dollar. The yuan-dollar exchange rate went from 6.83 yuan to the dollar to 6.79 and U.S. stocks boomed. Then the Chinese government weakened the yuan back to 6.82 and U.S. stocks fell. Here's the relevant sentence from the Associated Press story:

Beijing has ruled out any major revaluations for the yuan, saying the currency is at about the right level.

Congressional pressure for a change in Chinese exchange rate policy was building, but the Chinese government riggled off that hook, easily, through an insignificant strengthening of the yuan.

As I pointed out a few days ago (Congress plans ineffective action against Chinese mercantilism), there is no need to keep letting China off the hook. The real problem is China's mercantilist strategy of maximizing exports and minimizing imports. Congress could end that strategy, once and for all, simply by requiring balanced trade. I wrote:

What is needed is an across-the-board tariff on Chinese products whose rate is tied to the size of the US-China trade deficits. In 2009, China exported $305 billion worth of goods and services to the United States while the Chinese government only allowed its people to import $86 billion of American products.

With a tariff rate tied to the trade deficit, the Chinese government would be forced to take down its many tariff, non-tariff, and currency-manipulation barriers to United States products. American corporations would be able to produce in the United States and still have access to the Chinese market. Not only that, but the tariff would help balance the federal budget while being in complete compliance with a special WTO rule for trade deficit countries.