Chinese Act: Analysis

While at the YLP (Youth Leadership of Pinellas program) retreat, my friend Andrew N. and I embarked on a debate of whether it is in America's best national interest to impose a 27% tariff on all Chinese products. The China Act of (formally known as the Currency Harmonization Initiative through Neutralizing Action Act of 2005; title HR 321 for reference purposes), was reintroduced in the United States House of Representatives on January 9th, 2007, contending that the U.S. Secretary of Treasury must ensure that "additional tariffs be imposed on products of that country on the basis of the rate of manipulation by that country."

Present data indicates that 8.3 yuan is equal to one U.S. dollar, an exchange rate that has existed for decade, leading "some U.S. lawmakers and manufacturers [to] argue that [the practice] vastly undervalues the currency, [letting ]Chinese companies undercut U.S. rivals. " The American business community and protectionist supporters are additionally concerned about the subsidies that the Chinese government provides to Chinese corporations. According to Franklin L. Lavin, Undersecretary of Commerce for International Trade, the practice "gives Chinese exporters an unfair advantage in the U.S. market."

The idea of any sort of government involvement in corporate regulation deserves but most severe condemnation. In that aspect, I myself am critical of the Chinese government subsidizing domestic corporations. In retrospect, however, the system only corroborates an economic argument that shall (hopefully) one day permeate the international community: harmful and coercive monopolies can only be formed through government intervention. At the same time, however, U.S. doesn't have exactly a clean record either. As argued by Hua Min, head of the World Economy Research Institute at Fudan University in Shanghai, "United States just a few years ago was found to be giving illegal tax rebates to companies such as Boeing and Microsoft."

With subsidies aside, let us look to the resulting implications of a successfully passage of the Chinese Act. Before doing so, however, we need to be clear on the intent of of the legislation's author, Representative Phil English. Rather than giving our own corporations a competitive edge in the market, English argues that "It puts pressure on them [China] to move and it comes at a time where they seem to be digging in their heels." Essentially, the policy is meant to temporarily symbolic, rather than imposing any sort of a long-term protectionist mindset on the global economy. That is, until the Chinese reevaluate the alleged undervalue of their currency. With this information in mind, let us now move onto an analysis of the economic impacts of the legislation.

According to Myron Brilliant, vice president for Asia at the U.S. Chamber of Commerce, "Tariffs being imposed on foreign goods does negatively impact consumers; it limits their choices and raises their prices." The idea of tariffs imposing negative economic externalities, including those cited by Brilliant, is effectively explained in one of my other entries specifically focusing on the topic of tariffs (Import tariffs: Decline of reason). Because several of the stores that American citizens are accustomed to (Wal-Mart, Home Depot, and Best Buy come to mind), it is likely that we'll see a decline in the general availability of low-cost goods, as even now, individuals as Gao Junjie, a manager at the Shandong Chenming Paper Holdings, are condemning Washington. Because the 27% tax increase will act as a deterrent to Chinese products, we'll begin to see a decline in the general availability of low-cost Chinese goods.

On the other hand, however, in the words of Alan Greenspan, the Federal Reserve Chairman, "The broad tariff on Chinese goods that has recently been proposed, should it be implemented, would significantly lower U.S. imports from China but would comparably raise U.S. imports from other low-cost sources of supply." Because the demand for low-cost products would not decrease, we'd be faced with the reality of having to purchase products from other low-cost areas, including Taiwan and Indonesia. It seems then, that the the argument of "dumping" foreign, low-cost products into the American domestic market fails dismally at this level.

What then, one might ask, should be done to rectify this global, economic strife?

First, the Chinese government needs to stop arguing that the subsidies it provides to private corporations are "temporary assistance that the government provides state-owned companies to ease their transition toward capitalism." State-based assistance to private economy is a perversion of any ideal even remotely associated with capitalism, as it is only through government intervention in the economy that coercive monopolies can be created.

Second, arguably, the United States is right in asserting that the yuan should not be regulated by the Chinese government. Because several economic analysts have argued that the price of yuan is severely undervalued in contrast to its real value in a free-market economy, it is clear that the supply and demand business model needs to be applied in this situation. In fact, because the yuan is so undervalued, the Chinese government, who purchases the great majority of our treasury bonds, is able to increase our deficit through reduced interest rates.

The Chinese economic structure, however, is largely dependent on exports, rather than domestic demand. Because of this reality, the process of instituting tariffs as an economic deterrent is alarming, as it would have a detrimental impact on the Chinese economy. And while this may, in retrospect, achieve the the protectionist goals, the use of tariffs is a risk that may ultimately negatively effect the consumers in the short term, and would defeat the purpose of the legislation (to call for "fair" competition practices) in the long term.

So how can the U.S. achieve their goals without violating the very same principles that we're so adamantly fighting for? We have several options before us:

1. The U.S. needs to work towards deficit reduction by curbing finances to fruitless efforts (i.e. the Iraq war)
2. The U.S. ought to facilitate diplomatic debate as to encourage China to pursue a gradual elimination of its state regulation of both the foreign and domestic economic practices. The recent passage of a comprehensive legislation increasing property rights of foreign investors is a clear step toward this direction.
3. As argued by Fred Bergsten, a Director for the Institute for International Economics, "the first step...is that we go to the (International Monetary Fund), which has very clear rules against currency manipulation. If that itself doesn't work, then I would go to the World Trade Organization and file a case that China is violating two or three different obligations that are there, which would require them to move their exchange rate and, if not, face trade retaliation." I agree with Bergsten in that international pressure may be a tangible option in forcing China to migrate to the free market model. As China is currently one of the top 5 nations with the highest voting power in IMF, political deterrent seems a more viable alternative to tariffs (e.g. decreasing its voting percentage.) Indisputably, however, an all comprehensive tariff should not be discounted off the table. Rather, let's leave it as last line of defense.
   

References:

http://news.com.com/On+challenging+China+with+a+tariff/2008-1082_3-5746354.html
http://www.imf.org/external/np/sec/memdir/members.htm#total
http://www.appletreeblog.com/?p=1647
http://www.foxnews.com/story/0,2933,161160,00.html
http://www.washingtonpost.com/wp-dyn/content/article/2007/04/02/AR2007040201496.html
http://www.chinadaily.com.cn/english/doc/2005-06/24/content_454322.htm