Friday, September 24, 2010

Tariffs and China

Free trade works as long as everyone plays by the same rules. Countries should practice it as long as every other country accepts the rules. That’s why European countries who try to protect their agricultural sector run afoul of the rules when they provide subsidies for farmers.
America has believed in free trade because the business sector wanted us too and because they pushed their friends in Congress to treat it as a holy mantra. Bush and the Republicans thought it was great, and Geithner and Obama also seem to worship it. Every time Geithner went to China it was as a supplicant. Schumer would rail against the yuan, and then visit China where everyone treated him so nicely and gave him so much Moutai, he forgot why he was there.
I respect China and have many good friends there, but I would like everyone for the moment to think of this as a poker game. The US and Europe are playing poker with the Chinese, so whenever someone raises, the US and Europe put in a dollar and China puts in 80 cents. But when China wins, they get everything on the table. Their currency is at least 20 percent lower than it should be. The yuan, unlike all of the currencies of China’s trading partners, is not allowed to float. (Our dollar may go up in value, but the government can’t officially do anything about it. The Chinese, however, can decide how much they allow the yuan to appreciate.)
Given this situation in which America has prostrated itself in front of the Middle Kingdom and the yuan has not made an appreciable move higher, what can America do about it?
In the past America has said, “Oh goodness, gracious, that doesn’t seem fair.” There is another way to deal with this and the house is apparently moving that way this morning. It’s only possible because both Republicans and Democrats are up for re-election. Most people in this country want something done about this.
Therefore, tariffs are the answer until the yuan is allowed to rise to its real level. I will be talking to some of my friends on Saturday to see what their reaction is to this, but I believe that America has to wake up and do this.  China recently indicated that companies that want to sell cars in China have to turn over proprietary information on electric car technology to China. There are many ways in which the Chinese government controls access to its markets.
But when placing the tariffs on selected goods, America must say plainly that it was forced to do this and has no antagonism towards China. All it would take for it to end would be currency parity.  This is not a step towards estrangement from China or indicates anything else is below the surface on this move.
We should emphasize that we respect China, and explain the American people want it and that it’s  fair. It’s not a bellicose move that we are making.

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