Thursday, September 16, 2010

The Politics of the Anti-China Bill

For the sake of convenience and rabble-rousing I'm going to refer to the Currency Reform for Fair Trade Act as the Anti-China Bill. The bill will essentially allow the US to impose trade sanctions against countries that manipulate their currencies. The best thing written about the bill and Geithner's speech today is from the Economist's Free Exchange:
Pundits have been demanding that Mr Geithner pressure China to allow its currency to appreciate against the dollar, and Mr Geithner (reluctantly, one imagines) is rising to heed the call.
. . .
It was American pressure that led the Chinese to de-peg their currency in the first place; recall that they wanted to avoid heated confrontations at the June G20 summit. And American pressure has likely contributed to the recent sharp rise in the yuan (which has appreciated by 1.25% in just the last fortnight), though signs that the Chinese economy is achieving a smoother landing than previously believed have obviously helped.
Persuasion, in other words, is working.
. . .
My view is that China recognises the need to let its currency rise, and when economic conditions permit it is willing to move toward gradual appreciation.
. . .
Actual trade confrontation, on the other hand, would be very messy. Chinese leaders are explicitly warning that sanctions would be counterproductive. Some American leaders and pundits seem to assume that if persuasion is working, an aggressive policy confrontation would work better.
. . .
But there's an election on, and populism is ascendent, and the trade warriors in Congress will have their day. I just hope the legislature holds to its recent pattern of behaviour—all talk and no action.
A qualitative analysis of why it matters that it's an election year goes something like this: While the Democrats have been in power the US unemployment rate is hovering around historic highs for a historically long time. Democratic policies have either failed or appeared to have failed to fix the unemployment situation. In a bid to deflect blame for the poor state of unemployment from themselves, the Democrats have chosen an external target: China. Simplified, they claim that unemployment is due to the trade imbalance which is due to an under-valued renminbi.

Supposing that trade tends to be good for the economy and that data shows that manufacturing jobs in the US have been in steady decline since the '50s, one should only be able to make the above argument if they are intellectually dishonest because they arguing for what they should argue for politically even if it is not a real solution. If this is the case, then one would expect that Democrats who sponsored the Anti-China Bill are disproportionately in congressional districts where they are not considered safe in the mid-term elections in November. So I took a look at the congress people who endorsed the Anti-China Bill, and whether or not they are considered to be safe in the November elections according to Real Clear Politics polling.

Of the 146 sponsors of the bill, 103 are Democrats and 43 are Republicans. Of the 43 Republicans, 40 are considered safe, and 3 are in districts that are likely or leaning Republican. Of the 103 Democrats, 47 are in districts considered safe, 23 are in likely/leaning Democrat, 18 are in tossup districts, and 15 are in likely/leaning Republican. The 18 Democratic congressmen in elections that are considered tossups represent half of the total 36 Democratic congressmen in tossup elections, and the 15 Democrats in elections likely/leaning Republican represent half of the 30 total Democrats in those elections.

I think that's some pretty good evidence that quite a few of our elected representatives are being intellectually dishonest with themselves and their constituency. plus ça change, plus c'est la même chose...

3 comments:

Anonymous said...

Your thinking is muddled and hence your writing is muddled. For example, your runon:

"Supposing that trade tends to be good for the economy and that data shows that manufacturing jobs in the US have been in steady decline since the '50s, one should only be able to make the above argument if they are intellectually dishonest because they arguing for what they should argue for politically even if it is not a real solution."

Wow.

Please take a basic macroeconomics course. Currency manipulation shifts jobs from one country to another. Just because the parasite has been attached to the host for a long time does not mean that we should not kick it off when it would be most beneficial for us rather that when it is most beneficial for them.

Please read the history of the currency manipulation relating to the RMB:
http://en.wikipedia.org/wiki/Renminbi#Value

Please consider this graph regarding manufacturing jobs in steady decline since 1950: http://www.epinet.org/briefingpapers/171/figurea.gif

Here's the upshot: China, Japan, and many other countries grow their economies via currency manipulation. The US benefited too through cheap goods (for consumers) and a cheap dollar meaning cheap funding (low interest rates). Now, the world's economies are in turmoil, the US doesnt need low interest rates - people flock to the US dollar. But we do need the jobs for the goods.. even if they wont be cheap.

Tariff and other measures that raise the cost of goods are the only means to counter a country that practices currency manipulation.

The US needs to balance the currency again. Just because politicians finally grew some balls and are now doing something about China doesn't mean we should fault them for only growing one ball each.

Will Lewis said...

First, let's consider what I quoted and wrote because you are attacking a straw man. What I quoted, and what I said is the best post today on the topic, says that the yuan does indeed need to be revalued. However, Beijing is revaluing, and this revaluation will take time. Beijing has strongly indicated that it will take its own trade related actions if we pass retaliatory trade sanctions. The benefits to the manufacturing industry from freer trade are quite obvious and the effect of currency manipulation on industry is eerily absent in the following graph, which is from about as independent of think tank as you can find:
http://www.aier.org/images/stories/research/industrial_production2.gif

Second, I'll consider your "graph regarding manufacturing jobs in steady decline since 1950," which was posted by a think tank funded by labor unions. It certainly bolsters the point you're trying to make if, of course, the population of workers in the United States had remained static from 1946 to 2003. It didn't. You know this. So why not take a look at a graph that conveys real information about US manufacturing employment from approximately 1940 to 2010:
http://www.economist.com/blogs/freeexchange/2010/08/manufacturing

Also, your graph actually shows that US manufacturing in 2003 is almost the same as in 1950. And the y-axis is skewed.

Third, do you understand input costs? Chinese input costs for many of the products that we import are only around 10%. We're talking the two top imported products: 1) electrical machinery and equipment, and 2)power generation equipment. That means that a 20% increase in the value of the yuan would result in only a 2% increase in the price. American manufacturing would still not be competitive. Source: Robert Pozen, http://online.wsj.com/article/SB10001424052748704023404575429843465266202.html?

Conclusion: In US manufacturing there is an output growth and job proportion decline paradox. If currency manipulation seriously effected trade, then it would first have a negative effect on manufacturing output, and manufacturers would then cut jobs proportionally. Jobs would not be cut before output declined if currency manipulation were the culprit. But currency manipulation did not seriously affect manufacturing output. Manufacturing output has done nothing but grow, outside of cyclical hiccups. Additionally, a higher currency will not bring jobs back home. The manufacturing industry is plenty health already with the same size workforce it had 60 years ago.

goldtracker said...

You know, that part about the shifting of blame from DC policy to China for the unemployment situation is probably right on the money. They are fond of smokescreens and mis-direction (left and right).

The fact remains we've pretty much dug our own hole and jumped head first into it.