Correction to This Article
An editorial on Friday mistakenly described China's currency as overvalued, rather than undervalued, compared to the U.S. dollar.
Wrong Target
If it takes off, a congressional assault on China for its overvalued currency will surely boomerang.

Friday, June 22, 2007

THIS WOULD seem to be an odd time for Congress to start a trade war with China. American exports are booming, both to China and the rest of the world; they set a record in April, and the overall trade deficit dropped 3 percent in the first quarter of 2007. Thanks in part to this good news, the economy is growing well, and unemployment remains low. Meanwhile, China's explosive growth and bottomless demand for imports is fueling a global economic expansion that is improving living standards for countless millions of people, especially in the developing world.

Yet a powerful and bipartisan group of senators has chosen this moment to introduce what the lawmakers hope will be veto-proof legislation designed to force the Bush administration into harsh punitive measures against Beijing because of its failure to more quickly revalue its currency against the dollar. Were it to pass and be implemented, the bill would rain on the ongoing global party of prosperity and would unnecessarily worsen U.S.-China relations without solving the problem it nominally is aimed at.

The problem, as Sens. Charles E. Schumer (D-N.Y.), Lindsey O. Graham (R-S.C.), Charles E. Grassley (R-Iowa) and Max Baucus (D-Mont.) see it, is the expanding U.S. trade deficit with China, which hit $232 billion last year and is on course to rise well beyond that this year, despite the double-digit rate of increase in U.S. exports. The legislation would compel the U.S. Treasury to report on "fundamentally misaligned currencies" -- meaning the yuan -- and, in the event that Beijing did not quickly respond, mandate anti-dumping sanctions. Duties on imports and cuts in U.S. government loans and federal procurement of Chinese goods would kick in unless Beijing rapidly pushed up the yuan's value.

First, consider the economic impact of the measure. In the unlikely event that China revalued its currency by 20 to 40 percent, the U.S. trade deficit might not change much, since the toys, apparel and electronics that dominate Chinese exports to the United States would probably be supplied by other low-cost producers in Asia or Latin America, not by U.S. producers. Consumers in the United States would probably face higher prices at a time when inflation is already a worry. Meanwhile, China's growth spurt could slow considerably, with global repercussions.

More likely, Beijing would angrily reject the congressional ultimatum -- just as the United States would, were China to demand that the U.S. government cut its budget deficit or face sanctions. U.S. exporters or investors would be likely to face retaliation; at worst, Beijing could decide to sell enough of the more than $1 trillion in U.S. government debt it holds to seriously destabilize the American economy. The economic tension could easily spill over into political relations, complicating U.S. attempts to gain China's cooperation in stopping the North Korean nuclear program or the genocide in Darfur.

As the World Bank recently underlined, China's overvalued currency is contributing to global economic imbalances. It needs to be corrected, though a too-rapid adjustment could do more harm than good. Either way, the U.S. trade deficit is not likely to be much affected. If Congress is really interested in fixing that problem, a much more effective measure is readily available: a reduction in the federal budget deficit.

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