Man China has had a really rough week. A bipartisan group of economists ranging from Paul Krugman to the conservative Fred Bergsten of the Peterson Institute have called for tariffs on China to fix the currency manipulation problem. Then a bipartisan group of 130 Congressman ranging from Dennis Kucinich to Joe Wilson sent a letter demanding the Treasury Department confront China about their currency manipulation. Then Dominique Strauss-Kahn, the head of the International Monetary Fund said Wednesday that something needs to be done to address China's currency undervaluation
It seemed like everybody was against China. Everyone was so upset and yelling at China. China didn't know how to respond.
So finally they decided to use the dreaded line that everyone in a relationship hates to hear. Speaking yesterday, Commerce Ministry official He Ning told reporters that China could deal with the issues if U.S. leaders avoided "emotionalization".
Yeah that's right. China is just "emotionally unavailable".
Geez Washington - Why don't you just let China relax? Don't you understand that China can't talk with you getting all emotionally up in their face. China just wants to kick back, watch some March Madness, and have a few beers with its boys. Chill out U.S.A.
Unfortunately, this isn't some episode of the Real World, but the real world of international trade. The U.S. shouldn't just chill out and accept losing 2.4 million manufacturing jobs largely to China due to unfair trading conditions. In addition, China is threatening jobs and lowering wages through its unfair competition in places like Brazil, India, and Europe as Martin Wolf points out in the Financial Times. The world shouldn't chill out either as China threatens the whole world with what some have labeled the "world largest bubble economy" propped up by illegally overvalued currency.
If China is too emotionally unavailable, well then we can just fix the problems by ourselves. Paul Krugman lined out in the New York Times how we can do it and how it won't hurt us:
First, the United States declares that China is a currency manipulator, and demands that China stop its massive intervention. If China refuses, the United States imposes a countervailing duty on Chinese exports, say 25 percent. The EU quickly follows suit, arguing that if it doesn't, China's surplus will be diverted to Europe. I don't know what Japan does.
Suppose that China then digs in its heels, and refuses to budge. From the US-EU point of view, that's OK! The problem is China's surplus, not the value of the renminbi per se - and countervailing duties will do much of the job of eliminating that surplus, even if China refuses to move the exchange rate.
And precisely because the United States can get what it wants whatever China does, the odds are that China would soon give in.
Look, I know that many economists have a visceral dislike for this kind of confrontational policy. But you have to bear in mind that the really outlandish actor here is China: never before in history has a nation followed this drastic a mercantilist policy. And for those who counsel patience, arguing that China can eventually be brought around: the acute damage from China's currency policy is happening now, while the world is still in a liquidity trap. Getting China to rethink that policy years from now, when (one can hope) advanced economies have returned to more or less full employment, is worth very little.
You hear that President Obama? Don't fall into China's trap that you need to just chill out. While China is hanging out at the bar with its boys, it's going to be stealing our jobs and ruining the global economy.