China bashing is all the rage in Washington, as politicians of both parties blame the world’s fastest-growing major economy for high jobless rates in the U.S.
Such a popular target is China that the U.S. House of Representatives, all but paralyzed by the prospect of next month’s election, easily passed a bill last week that might impose tariffs on China in retaliation for currency manipulation.
Blaming China is fun for the political and intellectual elites because it allows them to ignore their own failures. Gridlocked politicians on both sides of the aisle are equally attracted to the claim. The problem with U.S. growth isn’t that we have an out-of-control government and the second-highest corporate tax rates on earth; it’s all China’s fault.
As political scapegoating goes, this is easy -- too easy. In truth, the impact on the U.S. economy of a change in Chinese currency policy could well be so small that it would be almost impossible to detect.
First consider the arguments of those who say the U.S. would see significant benefits from a more freely floating yuan.
C. Fred Bergsten of the Peterson Institute for International Economics testified in the House last month that “elimination of the Chinese misalignment would create about half a million U.S. jobs, mainly in manufacturing and with above-average wages, over the next couple of years.”
How to accomplish that? Bergsten estimates that an appreciation of about 25 percent against the dollar would be necessary to restore an equilibrium exchange rate. When he testified on Sept. 15, the yuan had risen at an annualized rate of only about 4 percent since June, when the Chinese government pledged more flexibility. The growth rate does seem to have increased since Sept. 15.
Bergsten recommends that the U.S. designate China as a “currency manipulator” and encourage other nations to apply pressure on China to change its policy. He also says the U.S. should engage in “countervailing currency intervention,” which means purchasing yuan to offset China’s dollar purchases.
There is a good deal of academic disagreement over the Bergsten analysis. Helmut Reisen, head of research at the OECD Development Center, part of the Organization for Economic Cooperation and Development, wrote in April that “it is far from assured” that an appreciation of the yuan would influence current account balances.
He added, “There is a clear political focus on the bilateral U.S.-Chinese trade balance, but bilateral imbalances are of no economic interest -- there are more than two countries in the world.”
Philip Levy, my colleague at the American Enterprise Institute, shares this view. The ripple effects throughout the trading world of a more flexible yuan could be enormous, diluting the specific impact on any one country, even if that country is the U.S.
If we buy fewer imports from China, we might just buy more from some other country. A sign that this effect might be important, Levy argues, is that even while Chinese imports into the U.S. have been surging, total Asian imports have been roughly constant. This suggests that at least part of the impact of a change in Chinese currency policy would be a tweak in U.S. trade with Malaysia or Japan.
Economist Ray Fair of Yale University attempted to account for ripple effects in a paper that analyzed the macroeconomic impact of Chinese revaluation.
“The estimated effects on U.S. output and employment are modest,” he wrote. “Positive effects on U.S. output from a decrease in imports from China are offset by negative effects on U.S. output from increased inflation and from a decrease in U.S. exports to China because of a Chinese contraction.”
History as Guide
History also is a guide. If changes in the exchange rate are truly a big deal, then the U.S. trade deficit with China should have decreased during the Chinese currency appreciation from 2005 to 2008. Instead, it grew.
Then there’s the question of scale.
Assume that starting in August 2008, when China’s last revaluation ended, U.S. imports from China started tracking those of Japan, another big Asian trading partner of the U.S. that does let its currency float. Under that scenario, imports from China this year would have been about $27 billion lower. In a $14 trillion economy, that is hardly enough to have much of an impact on jobs, especially if imports from other countries increase.
Economic policies with uncertain benefits can be defensible if they carry no cost. Bashing China has real costs: It might cause a trade war reminiscent of the one that put the world economy into a death spiral in the 1930s. And it definitely distracts attention from the need for government policies that directly help the U.S. economy and those looking for jobs.
So isn’t it time we left China alone?
(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He was an adviser to Republican Senator John McCain in the 2008 presidential election. The opinions expressed are his own.)
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