I have said it before and I will say it again, Congress is a rotten, stinking corpse. It is no wonder that it currently has the lowest approval rating of all time. This week more ridiculous legislation was introduced in that body that will only make our lives worse. The bipartisan bill that was introduced would punish any country that practices currency manipulation as an unfair trade subsidy. It would give President Obama the ability to impose retaliatory protectionist measures to level the playing field. Of course, the impetus for the legislation is China’s alleged undervaluing of its currency, the yuan, in order to support Chinese exports to other countries.
Now, it’s funny, how the legislation comes in an election year when there is a very strong anti-incumbent mood amongst the electorate. Many Americans who have lost their jobs in this depression are naturally fixated on statements from Washington dealing with job creation. So as not to disappoint, Democratic Senator Charles Schumer was quoted as saying, “"There is no bigger step that we can take to promote job creation here in the US than to confront Chinese currency manipulation." This sounds logical on the surface, but upon closer analysis the senator as usual has it all wrong.
In the first place, to even threaten protectionist measures in such a fragile economic environment is dangerous. The Smoot-Hawley Tariff was passed in 1930 and placed protective tariffs on thousands of imports coming into the United States from abroad. At the time, during the Great Depression, its purpose was to protect American jobs. Sound familiar? Instead, the tariff caused our trading partners to retaliate with tariffs of their own thereby exacerbating an already horrendous employment situation. What makes our politicians believe that China would not retaliate with protective measures of its own or worst yet cause the collapse of our currency by flooding the world markets with hundreds of billions of dollars it keeps in reserve?
But secondly, and much more importantly to our situation, we need inexpensive Chinese products otherwise our inflation rate would be through the roof and unemployment would be right there with it. Here is the vicious cycle of events that is American/Chinese trade relations. China’s products are cheaper because the cost of doing business there is less than in the U.S. Thus, we purchase Chinese goods with dollars and treasury notes. China holds these dollars and interest-bearing bonds in reserve and then prints yuan to pay off the Chinese suppliers of our purchases. When the smoke clears, we get cheap Chinese goods to buy, the Chinese manufacturer makes a profit, and the Chinese government acquires more units of the world’s reserve currency. Everybody wins, right?