The Wrong Way to Deal With China

[Taimoor Gondal]

China is undeniably manipulating its currency. Countries around the world, including the United States, are losing jobs because their manufacturing industries cannot compete with artificially cheap Chinese goods. For the good of the world economy, and its own long-term economic development, China should stop.
Still, a Senate bill, with strong bipartisan support, to punish countries that manipulate their currencies is a bad idea. It could do even more damage to the American economy if — as is all too likely — China decides to retaliate.
Senator Charles Schumer, a Democrat of New York, declared that the legislation “is a clear, unwavering message from both parties to China’s leaders — the jig is up; it’s time to stop gaming the system or face severe consequences.” Talk of payback is playing well with his colleagues. On Monday, 79 senators — 47 Democrats, 31 Republicans and 1 independent — voted to initiate debate.
Growing trade with China over the past two decades has been one of the leading causes of the decline of manufacturing employment. The United States would likely add jobs over time if the renminbi was allowed to rise more significantly. Some high-technology industries, like the nascent American solar-panel business, would be a lot more competitive against their Chinese rivals. But many of the low-wage businesses lost to Chinese competition — like toys and textiles — will never come back.
Stiff retaliatory tariffs or other punishments are also very unlikely to persuade Beijing to swiftly abandon a policy that has been at the core of its economic strategy for two decades. Instead, it could add an explosive new conflict to an already heavy list of bilateral frictions.
The Senate bill is intended to limit the executive branch’s discretion. It would require the Treasury Department to identify countries whose currencies were grossly misaligned — with China everyone’s favorite culprit. If Beijing persisted, Washington would be required — with a delimited presidential waiver — to stop spending federal dollars on Chinese goods, and consider the renminbi’s undervaluation in antidumping cases against Chinese imports. The Treasury Department would also be required to ask the Federal Reserve to consider acting in currency markets to counteract the undervaluation of China’s currency. And the bill would increase the pressure on the Commerce Department to impose tariffs on undervalued Chinese products.
Given Beijing’s history of meeting fire with fire, many experts fear that China would retaliate on other fronts, like dragging its feet on customs inspections of American imports, opening new antidumping investigations against American goods or slowing its promised efforts to halt the stealing of American intellectual property. Beijing might even slow the renminbi’s current rise against the dollar, which translates into an appreciation rate of some 10 percent per year, after taking Chinese inflation into account.
The Obama administration has been pressing Beijing on the broad range of economic relations. It has won some important cases at the World Trade Organization. But it could do more to challenge other illegal policies, like China’s ban on the export of rare earth materials used in high-tech industries.
It could more explicitly link China’s bid for a bilateral investment agreement with the United States and a designation as a “market economy” at the W.T.O. to improvements in Chinese policies. It should press the European Union, Brazil and others to increase the rhetorical heat. China’s undervalued currency hurts them, too.
Beijing is not immune to pressure. But the Senate bill is too blunt an instrument.

Source
http://www.nytimes.com/2011/10/05/op...=1&ref=opinion