Opinions in Washington on the revaluation of China's currency are becoming more contentious. The U.S. Senate Finance Committee and the Senate Banking Committee have approved bills aimed at pressuring Beijing to revalue the yuan despite the Bush administration's warning against such bills. However, 1,028 noted U.S. economists recently voiced their dissent in a petition. Beijing Review talked to James Anderson, Professor of Economics at Boston College, and Arnold Kling, an independent economist from Maryland, both of whom signed the petition.
Beijing Review: The petition states that the United States has been enjoying the benefits of free trade. Why then has Congress repeatedly resorted to trade barriers to resolve economic disputes with China?
James Anderson: Individual congressmen act from different motives. Some represent districts that have indeed lost jobs to trade, or at least believe that they have lost jobs to trade. So they act in the narrow interest of their constituents. These "losing districts" are really a minority. Some other congressmen side with those "losing districts" out of sympathy or because their constituents sympathize with them. Some other congressmen are genuinely ignorant of or confused about the realities of the benefits of trade. Finally, some other congressmen act cynically, pandering to opinions they know to be harmful to majority U.S. interests, but they think that the president will prevent any large damage from occurring because, whoever he will be after Bush, like all presidents he represents all the districts and is more internationalist than Congress. Congressional politics make trade issues look worse than they really are, and Congress has a record of backing away from doing real damage.
Arnold Kling: Some politicians think that they can get support by appealing to fear and hatred of foreigners.
It seems like a great number of renowned economists are universally saying no to the U.S. Congress' consideration of trade protection measures. Why is this? Do you agree?
James Anderson: It is true, and also true that even a number of economists who for various reasons did not sign [the petition] are also opposed to Congress on this issue.
Arnold Kling: Economists are more aware of the benefits of free trade than the average person.
How will the petition affect congressional decision-making? What do you expect it to achieve?
James Anderson: Our petition will have no more impact than the previous petition against the Smoot-Hawley Tariff of 1930 [which placed high tariffs on agricultural imports].
Arnold Kling: I don't think it will have much effect. Economists have influence when politicians are interested in our opinions, not when we volunteer our opinions.
What's your standpoint on the yuan issue, and do you think that a revaluation would greatly ease the U.S. current account deficit? How should China revalue its currency and to what extent?
James Anderson: I don't think that the revaluation of the yuan will make much difference. The bilateral trade deficit is a consequence of national budget balances, surplus for China and deficit for the United States. Only changes in these macroeconomic variables will alter the deficit. On the U.S. side, we must save or tax more or cut government spending. It is disingenuous, indeed almost criminally irresponsible, for Congress to distract attention from its own complicity in the bilateral deficit by threatening China over the value of the yuan.
Some evidence that revaluation won't make much difference is to be found in how little difference the revaluation of the Euro relative to the U.S. dollar has made.
Practically speaking, China might perhaps make some conciliatory gesture by agreeing to an intended time path of gradual revaluation. Such a revaluation is in China's interest even if there were not this pressure from the United States. It will ease inflationary pressures and harvest a deferred gain in purchasing power to the benefit of Chinese consumers.
Arnold Kling: Revaluing the yuan would do a bit to ease the trade deficit. But China's purchases of U.S. securities hurts China more than the United States. China would be better off with a hands-off policy toward its currency.
Are there any political forces at work in China-U.S. trade issues or currency issues? Is the currency issue going to heat up as the presidential election draws near?
James Anderson: This is hard to be sure about, but I think trade will be a minor theme in the national election. I suspect that the Iraq war will dominate political debate, or perhaps health care or tax reform.
Arnold Kling: I doubt that it will be a major issue, but I am not a political pundit.
(Chen Wen reporting from New York City)