October 2, 2011

GOOD NEWS: Senate Republicans and Democrats have agreed on legislation. Bad news: It is a counterproductive bill that purports to crack down on China’s alleged currency manipulation, all in the name of creating jobs for Americans. Senate Majority Leader Harry M. Reid (D-Nev.) has decided to bring the China-currency bill to a vote Monday — in part because the bill has enough Republican support to clear the 60-vote barrier.

China’s currency, the renminbi, is undervalued with respect to the dollar. And yes, this is a result of Beijing’s monetary policy, which is designed to boost Chinese exports. In theory, a stronger renminbi would be to the advantage of U.S. producers, because it would make American goods cheaper in China and Chinese goods more expensive in the United States.

But would it really create hundreds of thousands of jobs in the United States, as the bill’s advocates suggest? The verdict from an April briefing paper from the Federal Reserve Bank of St. Louis is: “probably not to any meaningful degree.” Overall U.S. employment is indeed a function of the U.S. balance of trade. While it’s true that the United States has been running a trade deficit for decades and that its deficit with China is a growing share of it, ending the trade deficit with China would not necessarily cure the overall U.S. trade imbalance. That’s because other low-wage countries that do not artificially depress their currencies could easily take China’s place. The components of many “Chinese” goods are already made elsewhere, imported by China for assembly and then reexported to the United States. Only 20 to 30 percent of the value of Chinese goods in the United States would be affected by a stronger currency.

China is already gradually revaluing the renminbi, in part because of pressure from the United States, but mainly because it must do so to stave off inflation within its own economy. The Treasury Department , preferring to continue its moderately successful jawboning, has declined to designate China as a currency “manipulator,” which would trigger sanctions under existing U.S. law. The new Senate bill would require the Treasury Department to designate “fundamentally misaligned” currencies, a looser standard than currency “manipulation.” U.S. firms could then ask for countervailing duties against particular products.

Arguably, the bill is mostly symbolism, since it would allow the president to waive these penalties if he thought enforcing them would hurt national security or the economy. All the more reason not to pass it: Why risk costly Chinese retaliation for the sake of a measure whose practical impact could be so easily nullified anyway?

To his credit, President Obama is not jumping on this bandwagon.But he still has not submitted three free-trade agreements, with South Korea, Colombia and Panama, for congressional approval, amid seemingly eternal partisan wrangling over related assistance for workers displaced by foreign trade. If Congress really wants to help American workers, it will end the stalemate and move these growth-enhancing pacts to final passage. The world economy has enough problems without adding a U.S.-China trade rift to the list.