Forget Revaluation. Hit China With Tariffs.
By the time China's delegation arrived in Washington last week for another round of "strategic dialogue," even Treasury Secretary Hank Paulson had to acknowledge that Congress would almost certainly take steps to slow Chinese imports.
This isn't about China bashing. Americans appreciate China's remarkable job in transforming itself from a poor, collectivist state into a capitalist, industrial juggernaut. And we have much at stake in China' s continued growth and success.
The American challenge is to slow the growth of a China trade that has become dangerously unbalanced. And now that China has made it clear that it cannot take the one step that would restore some balance -- revalue its currency -- our course is clear. Many of the same effects of a revaluation can be achieved through an across-the-board tariff on Chinese imports that would disappear as the yuan rises to "market" levels.
The world would not end, the global trading system would not collapse. Legal challenges would be filed, contracts canceled and China might impose retaliatory tariffs of its own. Chinese exports to the United States would slow, the U.S. trade deficit would moderate.
At some point, however, China would tire of an arrangement that required it to live with the disadvantages of revaluation (less export growth) without the benefits (a stronger currency that can buy more imports). And that would be a good time for some future treasury secretary to convene the next session of the U.S.-China strategic dialogue.