The New Red Scare: China as a Big, Bad Currency Manipulator

by robekulick

Leslie K. posted this comment awhile ago, which I’ve meant to respond to because it’s very relevant.

“Recently I heard Donald Trump recommending a tarriff on Chinese products; I gather because China manipulates its currrency. I thought this was an extemely bad idea because tarriffs beget more tarriffs and interfere with free market economics. What do you think?”

So for starters, I absolutely do not think we should retaliate against China. Even if China’s currency policy is bad for the US, punitive tariffs would be a terrible response. The famous economist Joan Robinson once commented as to trade:

"Even if your trading partner dumps rocks into his harbor to obstruct arriving cargo ships, you don‘t make 
yourself better off by dumping rocks into your own harbor."

Or as Greg Mankiw explains here, the effect of a tariff is to force US consumers to pay higher prices for goods they currently buy imported from China. In a time of economic hardship like now, a tariff isn’t just bad economic policy, but is cruel to those who are unemployed:

However, it is not even clear that China’s policy is bad for the US.

First if the Chinese currency is  significantly undervalued, then American consumers are benefiting. China is effectively paying our consumers to buy their products. Furthermore, as Mankiw also explains in the article above, to keep the Yuan’s value pegged to the dollar, China has purchased dollars on the foreign exchange markets and invested those dollars in US Treasuries pushing down interest rates and reducing our debt burden. Finally, even if China’s currency did appreciate significantly, it is unlikely that manufacturing would increase substantially in the US. The US simply doesn’t do much of the type of manufacturing that China specializes in, so it is likely that placing a tariff on Chinese goods would just cause manufacturing jobs to go to another relatively low income country. Actually, since the US specializes in the manufacture of high tech goods (it is not true by the way that the US doesn’t produce anything), if a trade war caused China to start purchasing high tech goods from other countries, US manufacturing exports might even go down as a result of a tariff.

Also, unfortunately the China hysteria is not just limited to lunatics like Donald Trump, even though his views on the subject are particularly asinine. Both President Obama and Mitt Romney, the Republican front runner, have suggested that China is a currency manipulator. Fortunately, I think we can trust that both President Obama and Romney are playing politics on this front and would not do anything significantly punitive to China.