As the Republican primary turns vicious, Mitt Romney is mobilizing his pro-business credentials by attacking his rival, Rick Santorum, for his "unapologetic defense of big labor'' and framing himself as the true fiscal conservative. At first, there might seem to be little ground for doubting Mr. Romney's business credentials. Although he certainly had a privileged upbringing, Mr. Romney also has a claim to being a business success in his own right that none of his rivals can match. Yet on the first day of his presidency, Mitt Romney wants to issue an executive order that "[d]irects the Department of the Treasury to list China as a currency manipulator in its biannual report and directs the Department of Commerce to assess countervailing duties on Chinese imports if China does not quickly move to float its currency." This shows exceptionally poor business sense and despite having endorsed Mr. Romney, Jon Huntsman (who speaks Mandarin and was the U.S. ambassador to China) has criticized his China policy. There are several reasons that Mr. Romney's nascent trade policy shows extremely poor judgement.
First and foremost, China's currency is no longer clearly undervalued and has been appreciating against the dollar since the summer of 2010. While the rhetoric might sound as good as it ever did to those looking for work, it is simply out of date. Attacking China when it is already moving in the right direction is an excellent way to undermine the ability of the U.S. to influence China in the future.
Second, the report is supposed to be the purview of the Secretary of the Treasury who "...shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade." Ordering the Secretary of the Treasury to produce certain findings reeks of the Bush era triumph of politics over reality.
Third, what a good businessman should understand is that trade is not a zero-sum game and that the economies of China and the U.S. are more complementary than competitive. An American company, Apple, has become the most valuable in the world in large part thanks to the incredible savings that resulted from manufacturing in China. The U.S. gained a number of good jobs designing, marketing and servicing Apple products. If anyone lost out it was Japanese and Korean makers of consumer electronics. Tariffs on Chinese manufacturing would hurt Apple and U.S. consumers (who would have to pay more for everything from iPods to tube socks) -- but would create few new American jobs because the manufacture of these devices would probably move to still lower cost countries like Vietnam. Evidence of how little exchange rates affect U.S.-China trade can be seen from the fact that the trade deficit has continued to climb even as the Yuan has increased in value.
Perhaps Mr. Romney's attitude results from a "barbarians at the gate" mentality that is often associated with private equity. This may well have been at the heart of Mr. Romney and Bain Capital's success and could probably be justified as an important part of Schumpeterian capitalism. But this is no way to run a nation and certainly not a responsible global power. The goal of the leader of the world's superpower, especially a leader and superpower that are supposed to believe in the free market, should be to set up a free and fair global playing field, not to throw around its weight anytime it does not get its way. Competition is the hallmark of a successful market, but cooperation needs to be the watchword for a global system. Indeed, the kind of tariff proposed would likely violate the rules of the WTO, an unworthy action that the U.S. should not be modelling for China.
Some might argue that Mr. Romney does not really intend to match his words with deeds and that he has little, if any, ideological conviction behind this or many of his policies. That likelihood should raise its own set of concerns. All presidential candidates make promises they cannot keep and must do some pandering. President Obama had promised to close the prison at Guantanamo and George H. W. Bush promised not to raise taxes. But, surely, they believed these promises to be worthy goals, even if they proved unwilling or unable achieve them. The country could certainly use a large dose of pragmatism and centrism, but threatening to brand China as a currency manipulator is neither. It is instead the worst kind of populist pandering -- stoking fears and increasing the chance of conflict. If Mr. Romney's threats are idle then they will undermine U.S. credibility, stoke fears and misconceptions, and make cooperation more difficult. If they are not, they risk starting a trade war that is unnecessary, probably unwinnable, and one the world economy can ill afford.
Sen. Ron Wyden: Trade Rules Matter
I am not denying that intellectual property protection is a problem. But there are several things to keep in mind. First, on a per capita basis, a recent article found that the cost of intellectual property theft in China is actually far less than in the US or most other developed countries: http://www.helsinki.fi/hum/confucius/archive/course%20and%20lecture%20material/ip%20material/IPR%20piracy%20perception%20and%20reality%20in%20China%20the%20US%20and%20elsewhere.pdf
Second, China takes foreign company’s IP concerns relatively seriously. You can take a look at a relevant paper I am working on here: http://www.indiana.edu/~rccpb/Working_Paper/Givens%20RCCPB%2017%20Litigation.pdf
Additionally, it is worth considering that we have taken the protection of intellectual property to an extreme in the US. Thomas Jefferson thought of patents a necessary evil. Hollywood’s movie industry, which tends to complain about China, exists because film studios were trying to avoid the enforcement of Thomas Edison’s patent on film cameras. Stricter enforcement of IP almost certainly benefits wealthy countries and established businesses at the expense of developing countries and sectors.
It is vital to remember that China, despite its clout, is still a developing country and from climate change to tariffs, international agreements and organizations can and do recognize that developed countries need to be treated with more leniency. In part, because many developed countries used these tactics during their development. This is something that the leader of the free world needs to recognize.
I can assure Mr. Smith that I am not writing propaganda for the PRC. If I were, I would not have to be so careful about local Public Security Bureaus when I conduct my research there.
In terms of the undervaluation of the RMB:
Last July, “[a] footnote in the report by an IMF internal group put the yuan as undervalued somewhere between 3 percent to 23 percent against a basket of currencies, depending on the type of methodology used to calculate its value.”
http://www.reuters.com/article/2011/07/21/imf-china-idUSS7E7FQ01820110721
Since then, it has appreciated approximately 2.5%. The Economist’s big mac index, on the other hand, found that last July the Yuan was not undervalued at all, if you adjusted for purchasing power parity:
http://www.economist.com/blogs/dailychart/2011/07/big-mac-index
The Yuan is probably somewhat undervalued. But this is a complex and technical question with no single answer and it should not be acceptable for politicians or anyone to pretend like the undervaluation of China’s currency is a forgone conclusion.
THE ONLY VOTE THAT MAKES SENSE IN 2012 IS THIS ONE: 99 to 1.
The rest of the article is just a repetition of Chinese propaganda:
- The yuan is still undervalued. It was undervalued as much as 40% two years ago, and has appreciated less than 10%. Do the math.
- The IMF is currently doing a re-assessment of just how undervalued the yuan is. There is not even a hint that it will find it anything but very undervalued.
- That the US trade deficit with China continues to grow as the yuan slowly appreciates does not show that the undervaluation of the yuan does not contribute to the deficit. It shows that that this is but one factor. Other factors that the Economist lists: "intellectual-property theft, the impossibility of winning government contracts, baffling rules on corporate ownership." And, of course, tariffs.
- We are already in a trade war with China, and China is winning.
So should we brand China a currency manipulator? No, let's focus on the bigger problem of intellectual property theft - not just through acceptance of counterfeits, by by extortion and and cyber-theft of American firms. Let's focus on restraint of trade: why are Facebook and YouTube outlawed in China? Why are Baidu and Sina allowed access to Chinese maps but not Google?