Protectionists in Congress are fond of using patriotic rhetoric to justify policies that will harm consumers, businesses, and the poor. Senator Sherrod Brown's (D-Ohio) recent touting of the "Currency Reform for Fair Trade Act" is no exception. Like many who claim to support "fair trade" rather than free trade, Brown relies on a simplistic view of international accounting in which nations, rather than firms, are portrayed as competing enterprises.
The bill would allow the U.S. to regard China’s undervalued currency as a subsidy, enabling the Obama administration to “level the playing field” by increasing tariffs on Chinese imports. However, a close look at the U.S.-China trade relationship shows that there is little economic sense in imposing such a measure.
Supporters of the bill, such as Rep. Sander Levin (D-Mich.), blame China’s alleged currency manipulation for the loss of “hundreds of thousands of American jobs.” The central claim is that China maintains an artificially low exchange rate for the yuan in order to make its exports cheaper. American-made products are then unable to compete with cheaper, Chinese imported substitutes, the story goes, resulting in the closing of American factories and lost jobs.
There are a few problems with this argument. First, the majority of imported products from China are actually used by American firms in their production processes. A recent study by the Federal Reserve found that for every dollar Americans spent on products labeled “Made in China,” 55 cents supported services produced within the United States. Just 45 cents worth of each dollar actually went to China to pay for the cost of imports. These figures communicate an important but overlooked economic truth: Chinese imports are creating American jobs, too.
So the next time you hear your representative blaming products that are “Made in China” for our high unemployment rates, remember that these products pay the salaries of American salespeople, truck drivers, and many other workers who help bring them to market. Many American workers owe their livelihoods to the availability of cheap Chinese imports — a fact that rarely enters the calculations of those who favor tougher trade restrictions. For this reason, it is likely that higher taxes on Chinese imports will cost as many, if not more jobs, than the import competition they were meant to deflect.
Second, there is little evidence that American and Chinese companies are in direct competition with one another. For example, a recent analysis by Harvard professor Mark Wu found that “in less than 15% of top export products — for example, network routers and solar panels — are American and Chinese corporations competing directly against one another.” The relationship between the United States and China is overwhelmingly one of collaboration, not competition.
Third, there is no historical evidence that a higher yuan-to-dollar exchange rate has a positive impact on American employment. In fact, the majority of evidence points in the opposite direction. As the Heritage Foundation’s Derek Scissors points out, the Chinese yuan has appreciated by nearly 20% in the past two decades. However, the U.S. unemployment rate has increased by nearly 40% over the same period. If an undervalued Chinese currency is the cause of American job losses, why has unemployment risen along with the value of the Yuan?
Worst of all, the main policy prescription contained in Sen. Brown’s proposal is a tax increase — not on the wealthy, or on large corporations, but on poor and working class consumers. Among the top imported products from China are clothing, bedding, and household products, which comprise a large portion of household budgets for lower income families. Tariffs on these products will saddle America’s most cash-strapped consumers with higher prices and fewer choices. So-called “fair trade” crusaders should think twice before punishing America’s most vulnerable citizens for the monetary policy of a foreign government.
Temptations abound for lawmakers to use China as a scapegoat in difficult economic times. Rather than pointing fingers at our most valuable trading partner, policymakers should focus on the true sources of our economic woes — a convoluted and inhibitive tax code, burdensome regulatory structure, and a government that picks winners and losers in the market. Until we address these problems, our politicians have nobody to blame but themselves.
Photo Credit: Robet S. Donovan