As mentioned, Mitt Romney released his
big economic plan last week. Let me first say that there is a lot in the dictionary-length manifesto that I like, such as his calls for reducing the corporate income tax rate, passing pending FTAs, and enhancing domestic energy production. However (and you knew that there was a "however"), as I
alluded to last Tuesday, one headline issue in the Romney plan is deeply flawed: his stance on China trade and, in particular, currency. The Wall Street Journal
recently expressed similar distaste for Romney's China trade plan, arguing that it could incite additional US protectionism and spark a "trade war" with one of America's biggest trading partners. But I think that the Journal was actually being far too kind on this front. Indeed, on China trade, Romney's plan is wrong-headed on pretty much every level: economic, legal, strategic and political.
But before I get into all of that, let's first see what Governor Romney proposes on China. First, the plan explains how the current US-China trade relationship is bad for American workers and businesses because it is "one sided." It targets China's lack of effective IPR enforcement, discriminatory procurement policies, market access restrictions and currency policies. On currency in particular, the plan states that "China’s unfair trade practices extend to the country’s manipulation of its currency to reduce the price of its products relative to those of competing nations such as ours. While the extent and impact of the manipulation is widely debated, the practice provides an invisible subsidy to Chinese goods sold internationally and an invisible tariff on other nations attempting to sell in China." The primary (only?) evidence of this assertion is the following graphic, which shows the current US-China trade balance:
The plan then suggests ways to change this "one-sided relationship." After arguing for more border enforcement to prevent Customs circumvention and for a more aggressive USTR at the WTO and in US courts, the plan promises an aggressive unilateral approach to China's currency policies:
Current U.S. law requires that the Department of the Treasury release a biannual review in which it identifies any countries that are manipulating their currency to gain an unfair advantage. The Department of Commerce also has the power to find that Chinese currency policy constitutes an unfair subsidy to Chinese exporters, and to assess countervailing duties on Chinese products. The Obama administration has declined to take either action, effectively accepting China’s problematic practices. That acceptance has to end. If China fails to move quickly to bring its currency to fair value, the Department of the Treasury in a Romney administration will designate China a currency manipulator and the Department of Commerce will impose countervailing duties.
So to summarize: as evidenced by the bilateral trade deficit, China's currency "manipulation" is unfairly tilting the playing field in China's favor; thus, President Romney would require Treasury to declare China a "currency manipulator" and then instruct DOC to impose countervailing duties (
i.e., tariffs) on Chinese imports unless China floats its currency. Indeed, one of President Romney's "Day One" Executive Orders would be an "Order to Sanction China for Unfair Trade Practices," which "[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."
As mentioned, there is a lot wrong with this plan, so let's go through it subject by subject. I've already addressed a lot of the problems with this line of thinking in
my April post on Donald Trump's similar China policy, so where possible I'm going to steal from that
because I'm lazy and no one is paying me for this.
1. Romney's plan gets its basic facts wrong. As I noted in April, any suggestion that China's currency policies are driving the bilateral trade balance and thereby harming the US economy is rife with problems. (I've replaced "Trump" with "Romney" here and throughout this post because they're basically arguing the same thing.)
[I]t's important to understand the serial fallacy of Trump[Romney]'s basic factual assertions, i.e., that (a) China's currency remains extremely undervalued versus the US dollar; (b) China's currency policies are driving both the US-China trade balance and US unemployment; and (c) that the US trade deficit, and especially the United States' bilateral trade deficit with China, is a big problem for the US economy.
As I've noted here many times, China's currency policies are not nearly the vehicle of economic destruction that Trump[Romney] and others claim them to be.... [A]s I've noted repeatedly here, the real dollar-yuan exchange rats has increased dramatically - almost 50% percent - since 2005. Second, as the real value of China's currency has increased, American unemployment has gone from about 5% in 2005 to slightly under 9% today, and the US-China trade deficit has (except for the recession) steadily increased. So there's no strong connection between China' currency and total American jobs or the trade balance (as the Congressional Research Service has repeatedly noted).
Next, Trump[Romney]'s assertion that $300 billion annual US-China trade deficit is a sign that America is "losing at trade" is the height of economic ignorance. First, there's actually a strong correlation between US economic growth and an expanding US trade deficit. As Cato's Dan Griswold recently wrote in a must-read paper on the subject:
An examination of the past 30 years of U.S. economic performance offers no evidence that a rising level of imports or growing trade deficits have negatively affected the U.S. economy. In fact, since 1980, the U.S. economy has grown more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to periods when it was contracting. Stock market appreciation, manufacturing output, and job growth were all significantly more robust during periods of expanding imports and trade deficits.
And if fixating on the overall US trade balance weren't dumb enough, Trump[Romney] goes one further and obsesses over an even more economically meaningless stat when he worries about the US-China trade balance. As I've noted here repeatedly, the proliferation of global supply chains and multinational investment has rendered bilateral trade balances a totally unimportant trade policy metric. Indeed, old school trade stats like these have become so obsolete that the WTO has launched a new global initiative to determine how better to account for actual trade flows. The most common example of the indisputable obsolescence of the US-China trade deficit is the iPhone (and the iPod before that): each device imported into the US from China accounts for about $300 towards the bilateral trade deficit, yet the Chinese get only about six bucks worth of value from the item's assembly and shipment. Meanwhile, the US-based Apple and its affiliates get hundreds of dollars from an iPhone's final US sale (for things like design, marketing, and even some manufacturing).
Even the idea that China is totally dominating the United States is absurd. Yes, China has experienced impressive GDP growth, but (a) that's what developing countries do; and (b) America is still much, much wealthier, greener, and more productive. Moreover, China's incessant quest for GDP growth through industrial planning has led to some pretty scary inflation (which is driving the increase in the Yuan's real value), some major league economic distortions (e.g., a frightening property bubble and an increasingly troublesome high-speed rail system), and a lot of other serious problems that, if not solved pretty quickly, could implode the entire Chinese economy.
None of these facts has changed since I wrote the post above. In fact,
additional factual support has emerged since I first wrote it. For example, the Economist's
Big Mac Index - routinely cited by American currency hawks - now shows that the RMB is slightly
overvalued versus the dollar.
2. Romney's plan is legally problematic.Unlike Donald Trump's brilliant plan to impose an across-the-board tariff on Chinese imports, the Romney plan takes a slightly more nuanced approach by designating China a currency manipulator in the Treasury Department's semi-annual currency report and directing Commerce to impose CVDs on Chinese goods. However, this change doesn't save Romney's plan from serious legal pitfalls.
First, as I've explained here repeatedly, Treasury's assessment and designation of foreign countries as "currency manipulators" is conducted pursuant to US law (22 U.S.C. § 5301-5306), which defines "currency manipulators" as countries that "manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade.” Treasury's assessment must be done in consultation with the IMF and prusuant to pretty strict guidelines. In short, the President can't just tell Treasury to designate a country a "currency manipulator," and he/she certainly can't do it publicly via Executive Order (as Romney's plan promises). To do so would not only violate the letter of the law, but also destroy the Treasury report's credibility.
Second, the President can't just instruct the Commerce Department to begin imposing countervailing duties on Chinese goods. Pursuant to
US trade law and regulations, the imposition of countervailing duties on imports requires (i) a petition from an affected industry or self-initiation by Commerce (something that never happens) requesting remedial tariffs on a discrete subset of allegedly subsidized imports; (ii) preliminary and final findings, based on extensive evidence (including rebuttal from Chinese producers, US importers and the Chinese government), of that said imports are being subsidized; and (iii) preliminary and final findings by the non-partisan International Trade Commission that said imports are injuring the US industry. Each of these steps is required by US law and WTO rules. So Romney's plan to, on the very first day of his presidency, just start imposing CVDs on Chinese imports would be in direct conflict with both US law and the United States' WTO obligations.
Third, even assuming that the Romney plan actually envisions a more subtle approach by merely authorizing DOC to begin investigating "currency manipulation" as a countervailable subsidy, it would still raise major red flags for two big reasons: (1) the treatment of a country's currency policy as a countervailable subsidy probably violates WTO rules (as I explained
here in excruciating detail); and (2) DOC's current policy for imposing CVDs on imports from "non-market economies" like China has been
ruled illegal by both the WTO's Appellate Body and the US Court of International Trade. So even assuming that the Romney plan takes this more conservative approach, it
still faces serious legal problems.
3. Romney's plan is economically unsound.Unfortunately for Governor Romney, the economics of his plan are just as dubious as its factual and legal premises. Assuming for a moment that the plan survives the legal problems I outlined above (an admittedly charitable assumption, I know), the imposition of tariffs on Chinese goods would end up causing a lot of pain (for both China and the US) for little or no economic gain.
First, as noted above, the Romney plan may be WTO-inconsistent, so China would very likely go straight to the WTO and could win the right to impose retaliatory tariffs on US exports in the amount of the damage caused by the tariffs. Considering that Chinese imports into the US totaled $365 billion in 2010 and that US exports to China totaled about $100 billion in 2010, this WTO-legal retaliation could take a significant chunk out of the United States' third largest export market (and one of American exporters'
fastest-growing markets - US exports to China have more than doubled since 2005).
Second, as I noted in April with respect to Donald Trump's call for tariffs on Chinese imports:
[T]he economic pain wouldn't stop with US exporters because the Trump Tariff, just like any other consumption tax, would inevitably increase US prices of everything that American consumers currently buy from China. Remember, US importers, not Chinese exporters, pay US tariffs and pass those on to American consumers. This, of course, means that American families, many of whom are already struggling to get by, would end up paying more - a LOT more - for food, clothing, electronics, Smithsonian souvenirs, and everything else that now says "Made in China." However, individuals wouldn't be the only ones screwed by the Trump Tariff - American businesses (and their many workers) would also be hit hard. Because almost half of what we import from China is industrial supplies and materials or non-automotive capital goods - i.e., inputs used by American companies - lots and lots of these firms would inevitably pay more for the things that they need to remain globally competitive. These higher costs, of course, also mean fewer employees, if not outright bankruptcy. Awesome.
[I]t's [also] highly unlikely that the Trump Tariff would lead to a significant increase in US manufacturing. Sure, a few directly competitive US companies would benefit from that sweet, sweet import protection (by being able to milk US consumers for more money, natch), but the far more likely result is trade diversion - i.e., our imports would shift from China to other (more expensive) foreign countries like Vietnam, India or Mexico. This is exactly what happened when the US imposed tariffs on Chinese tires under Section 421, and it's the very common result in anti-dumping and CVD cases.
Finally, even if the Trump Tariff succeeded in getting China to rapidly appreciate its currency (and, as noted below, it won't), it's far from certain that such appreciation would harm China's global competitiveness. As Cato's Dan Ikenson stated last year: "RMB appreciation not only bolsters the buying power of Chinese consumers, but it makes Chinese-based producers and assemblers even more competitive because the relative prices of their imported inputs fall, reducing their costs of production. That reduction in cost can be passed on to foreign consumers in the form of lower export prices, which could mitigate entirely the intended effect of the currency adjustment, which is to reduce U.S. imports from China." As an intermediate producer and big assembly hub, China is importing more these days than they did during the last period (2005-2008) of nominal currency appreciation, so Ikenson's insights likely hold truer today than they did even a few short years ago.
In sum, the Trump Tariff would cause massive pain for very, very little gain.
Since I wrote that,
other empirical evidence has emerged to further demonstrate the economic ignorance of any US plan to unilaterally attack China's currency policies via import tariffs. For example, the San Francisco Fed has
found that of every dollar spent on "made in China" product, $0.55 goes to US companies and workers. So any tariffs on Chinese imports would actually harm these Americans as much, or more, than it would Chinese producers. Also, the New York Fed
very recently demonstrated that (i) RMB appreciation has little affect on the prices of Chinese consumer goods imported into the United States; (ii) for basic commodities, a rising Chinese currency might just lead to trade diversion rather than bolstering the prospects of directly-competitive US companies; and (iii) increasing Chinese import prices can actually harm the US economy by feeding US inflation and raising input costs for American businesses. All of this strongly argues against Romney's duty-based approach to confronting China.
4. Romney's plan is strategically weak.There are also several strategic problems with Romney's plan for aggressive, uniltateral action against China. As I explained in April:
The idea that the Chinese government would just roll over and concede "defeat" in the face of President Trump[Romney]'s big, macho tariff is absurd. First, Trump[Romney] fails to grasp that the Chinese government would never, ever do anything that makes it appear weak in the face of American aggression. Instead, retaliation, not concession, is the far more likely reaction (just as China did when President Obama imposed those tire tariffs), and such sinophobic chest-thumping would likely retard, not quicken, the gradual appreciation of the yuan that China needs to undertake. Second, China's not nearly as dependent on the US market as Trump[Romney] seems to think. The EU is now China's biggest export market, and Chinese exports to the US represent under 30% of China's exports to its top 10 export destinations. So while the US market is big and important, China has other options. Third, China couldn't rapidly and dramatically appreciate its currency even if it wanted to because any such move would implode the Chinese - and by extension, global - economy.
All of this remains true today, so one must why Governor Romney thinks that designating China a "currency manipulator" and threatening it with legally-suspect countervailing duties would do anything to help US exporters sell more products in China. History has proven that the far more likely outcome of any direct confrontation is less trade, not more, between the United States and China. And I seriously doubt that the Governor wants that.
Moreover, and as I've repeatedly
explained here, prioritizing unilateral action on China's currency policies distracts from the real problems with the US-China trade relationship, such as IPR enforcement and market access. Romney's plan exemplifies this misstep: it mentions these other bilateral trade issues, but instead of focusing on them, its primary policy action - and the only thing warranting a "Day One" executive order - is on currency. And, let's face it, the chances of successfully negotiating or litigating these other, far more important issues after aggressively targeting China's currency policies would be dramatically diminished. In short, Romney's plan pushes an ineffectual and potentially harmful China trade policy at the expense of an effective and helpful one.
There is one other strategic problem with Romney's plan: it sets a bad, and perhaps uncontrollable, precedent. China is certainly not the only country in the world that is intentionally meddling with its currency for trade purposes. As I
noted a few days ago, the Wall Street Journal reported that Korea appears to be pursuing a similar policy (and is reaping the same inflationary problems because of it). And other
news reports indicate that many countries in Latin America and Asia are also attempting to temper the their currencies' appreciation. The United States runs a trade deficit with many of these nations, so once the pandora's box of currency protectionism is opened with respect to China, how will the Romney administration ignore perfectly-consistent calls from domestic industries or Congress for similar levels of protection from imports from these other "currency-meddling" countries? And if such pleas are ignored, how will President Romney justify only targeting China, and how would this disparate treatment not lead to serious bilateral conflict? And, finally, many have argued that the United States' easy money policy is creating an artifically weak US dollar and thus giving US exports a similarly "unfair" advantage in other markets, so what's to stop China or another country from targeting these "subsidized" US exports in a similar protectionist fashion?
Should this really be the platform of the supposedly safe, business-savvy GOP candidate? Really?
5. Romney's plan is even bad politics.According to the aforementioned Wall Street Journal editorial, Romney's staffers explained that the China section of his economic plan was inserted at the the insistence of Romney himself, thus indicating that it was far more about politics than economics or good policy. However, attacking China's currency policies is not a shrewd political move for a GOP candidate for several reasons.
First, the plan is straight out of the DNC's playbook - literally. Currency/CVD legislation is a pillar of the Democrats' protectionist
"Make it in America" agenda, so the idea that aligning oneself with Nancy Pelosi, Harry Reid and Chuck Schumer (and against a large majority of House and Senate Republicans) is a surefire political winner for a GOP presidential candidate seems a tad far-fetched.
Second, the plan undermines Romney's political strengths and accentuates his biggest political weakness. Romney prides himself on being a pragmatic, "data-driven," businessman with a firm grasp of the global economy, but, as I've explained in excruciating detail above, this plan displays a startling ignorance of the global economy and US law. Romney also bills himself as being a "safe," moderate pick who can win nervous independents, but instigating a major conflict with one of America's largest trading partners and needlessly exposing US consumers and exporters to possible economic harm is hardly a "safe" move. Finally, perhaps Romney's biggest weakness is his image as a "fllip-flopper" who will do or say anything to win the election, and his new, aggressive China trade plan will only help to cement that image because it's a 180 degree turn from his
2008 campaign platform that, as the WSJ noted, almost everyone recognizes as politically motivated.
Third, assuming that Romney is the GOP nominee, the plan sets him up for an embarrassing exchange with President Obama in the general election. The Romney plan is clearly intended to demonstrate that Obama has been "weak" on China trade issues. And while this general point is certainly debatable, if Romney accuses Obama, as he does in his economic plan, of handling the currency issue poorly, the President can quite easily explain - far more succinctly than I do here - that Romney's alternative displays a serious ignorance of how the global economy, US law and the US-China relationship actually work. Why expose yourself to such a simple rebuttal instead of hitting Obama on real bilateral issues like our reckless deficit spending, which enables China's continued purchase of US government debt?
Finally, even assuming that the Romney team is just playing politics and doesn't actually intend to follow through with its China currency plans (a valid assumption, I think), the endorsment of the currency/CVD approach by one of the GOP's top presidential contenders could have serious, unintended political and economic consequences before the 2012 election by fueling congressional anti-China protectionism. Indeed, the plan could unintentionally achieve its politically-motivated goal by leading to the implementation of a US currency/CVD law. Problematic House legislation (
H.R. 639) mandating that the Commerce Department treat "undervalued currency" as a countervailable export subsidy now has over 200 co-sponsors, a large marjority of which are Democrats. If Romney's indirect endorsement of that legislation lets a few squishy House Republicans join as co-sponsors and thus gets the total number to 218 (an absolute majority), it could lead to a "
discharge petition" and force a floor vote on the bill, and there's nothing that sane/resistant GOP leadership could do about it. Senate Democrats have been itching to vote on similar legislation, and a few Senate Republicans (e.g., Lindsay Graham and the Maine Senators) would certainly join the charge, again with Mitt Romney's implied support. And does anyone expect President Obama to veto any China currency bill that reaches his desk?
As explained above, if that bill becomes law, it could have serious consequences for US exporters and consumers. And its implementation could legitimately be owed - at least in part - to Mitt Romney's economic platform. That's hardly what one should expect from the "safe" and "moderate" GOP candidate.
* * *
So there you have it, folks. Romney's China trade plan is very problematic from an economic, legal, strategic and political perspective, and in my humble opinion, a serious misstep by the candidate. Indeed, Romney's manifesto essentially admits the shoddy factual and economic basis for its assertions on China's currency when it states that "the extent and impact of the manipulation is widely debated." But if that's really the case, then why on earth is he promoting such an irresponsible and potentially damaging course of action? And can we really trust a candidate that would so imprudently promote such a policy just to score a few, shortsighted political points?
"Safe" candidate, indeed.
