Tuesday, August 07, 2007

Train Wreck

Desmond Lachman has an article at TCS Daily that warns of the consequences of the protectionism being contemplated by Congress:

Seemingly forgetful of the disastrous consequences for global prosperity of the 1930 Smoot-Hawley Tariff Act, today Congress has before it no fewer than 60 proposals to do something about the Chinese trade surplus. More ominous still, last week the Senate Finance Committee approved a proposal that would require the US Treasury to impose anti-dumping duties on China should China persist in maintaining an undervalued exchange rate. And the Committee did so with a 20 to 1 majority, which should be seen by China as the clearest of warnings that Congress could very well approve veto-proof trade legislation that would be inimical to China's longer-term economic interest.

Unfortunately, he sees this as a problem that the Chinese need to solve:

Among the leading protagonists in this drama are Chinese President Hu Jinato and Vice Premier Wu Yi, who represent the Chinese Communist Party in these talks. Filled with hubris, they never seem to tire of reminding Mr. Paulson of China's 5,000-year glorious imperial past. Nor do they tire of making it quite clear that a country of China's historic importance is not about to change its exchange rate policy under pressure from the United States, a relative newcomer on the international stage. Rather, they insist that the Chinese government will set its exchange rate policy exclusively in China's own national economic interest.

Who the hell do these Chinese think they are? They think they can set their exchange rate policy in a way that is in their own national interest? What chutzpah.

I don't think we have a trade problem, but if we do, devaluing the dollar is not the answer. That will only result in higher prices for Americans on the goods we buy from China. A nation cannot devalue its way to prosperity. If we want more companies to locate here and provide jobs for Americans, we need to make the business environment more friendly by making the cost of doing business here fall. That can be accomplished easily by cutting corporate taxes, something that our Congress can't seem to bring itself to do. Our politicians (and economists like Lachman) would rather bash the Chinese than actually do something about the long term problems facing the US economy.

Lachman is right that the protectionist legislation being proposed in Congress is disastrous. He is dead wrong in thinking that the Chinese should solve our problems for us. If the Chinese revalue their currency up against the dollar, it will only stregthen their long term economic prospects. That is why I suspect they will hold out until the last minute before revaluing significantly. And they will be applauded for doing exactly what they intended all along.

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