If a store is selling quality products at low prices, why would anyone want to shut it down? This rhetorical question was asked by economist Arthur Laffer last week in connection to an unprecedented attack on China trade by numerous U.S. senators. In response to the China bashing, the stock market plunged.
How fitting that such a misguided approach to both the economy and national security would come on the 75th anniversary of the infamous Smoot-Hawley tariff bill. According to economist Thomas Sowell, that massive tariff helped trigger the Great Depression, with U.S. unemployment rising from 9 percent in 1930 to 16 percent in 1931 and 25 percent in 1932.
Today, senators Smoot Schumer and Hawley Graham have proposed a 27.5 percent tariff on Chinese imports unless China raises significantly the value of its yuan currency. The senators seem to be angry at a rising bilateral trade deficit resulting from Chinese imports to the U.S. But so what? Free trade only empowers our consumers. In the last couple of years the U.S. has created about 3.5 million new jobs, the unemployment rate is only 5.1 percent, and the nation’s GDP is expanding at a 4.5 percent pace. Meanwhile, China’s economy continues to climb near a 10 percent rate, with the heretofore impoverished Chinese population slowly but surely entering the modern realm of rising global prosperity.
Schumer and Graham believe that a higher yuan would narrow the trade deficit. But Alan Greenspan completely disagrees. The Fed chairman told a Senate panel that “some observers mistakenly believe that a marked increase in the exchange value of the Chinese renminbi [yuan] relative to the U.S. dollar would significantly increase manufacturing activity and jobs in the United States. … I am aware of no credible evidence that supports such a conclusion.”
More, Art Laffer argues that a stable yuan linked to the dollar has promoted strong economic growth at low inflation for the U.S., China, and the rest of the world. “We have outsourced Alan Greenspan to China,” said Laffer, “and that’s a good thing for everyone.”
Think of the dollar-link as China’s gold standard, stabilizing the value of its currency and attracting foreign investment inflows to rebuild its economy. Destabilizing the yuan would be just as disastrous as the so-called Asian contagion of 1997-98 when Robert Rubin and the IMF forced the smaller Asian Tiger economies to de-link from the greenback. That only led to recession in the Pac Rim and intense deflation around the world.