Last week legislation was introduced in the Senate (SB.1586) to add a 27.5% tariff to Chinese goods unless they allow their currency to float.
Below are some excerpts from John Mauldin’s Weekly E-Letter Thoughts from the Frontline describing why this is a bad idea. My concerns are in bold.
This is bi-partisan idiocy of the first order, sponsored by three Democrats (Senators Schumer, Bayh, and Durbin) and three Republicans (Senators Bunning, Graham, and Dole). It is legislation like this that sometimes makes me despair for the future of the Republic. It is pandering of the worst sort.
Exactly what is this evil thing that the Chinese have done to warrant the attention of the Senate?
First, they fixed their exchange rate in 1994, and have not changed it since. How sinister to want a stable currency by fixing it to the dollar.
Second, they sell us goods at a price not only less than we can find elsewhere, but at one which we freely agree to pay. No nuclear threat. No economic blackmail. A simple free market transaction. In short, the Chinese are behaving like capitalists. (But are their markets open to our exports?)
Third, they have taken the dollars we have given them and actually had the temerity to invest it in US government treasuries, rather than buying our companies and real estate. They actually seem to trust the Fed a lot more than many of my readers.
Last year, over $56 billion dollars was invested by non-Chinese companies (mostly Western) into China to outsource manufacturing. Their exports have tripled to $365 billion in less than ten years. Over two-thirds of that is because of foreign investment. How dare they create economic conditions which force companies all over the world to invest tens of billions? Using competitive advantage is clearly something that only western nations can do in the eyes of these senators.
What’s a Senator to do? We have to show we care. Let’s blame someone besides ourselves. Instead of getting rid of laws which hinder job growth, capital formation and entrepreneurs, let’s see if we can destroy the economy of the world.
In 1930, two well-meaning US legislators named Smoot and Hawley persuaded Republican President Hoover to pass the Smoot-Hawley Act, which raised tariffs on foreign goods in order to protect American jobs. It started a world-wide trade war and turned a normal business cycle recession into a world-wide depression and led to the ripe conditions for WW II. The law of unintended consequences was never more harmful. Protecting a few American jobs ultimately cost millions of lives, both American and all over the world.
What does such action say to third world countries that are coming to the next round of free trade talks in Cancun? Are we for free trade or not? Is free trade with the US ok, as long as you are not too successful? Is it OK for everyone else to change, just as long as the US does not have to? That it is ok to be protectionist when it is local jobs? (Can we inspect all the goods being imported, or, are we giving terrorists an easy way to get weapons of mass destruction into our country?)
The steel tariffs that Bush ’43 passed last year have cost the US far more jobs than the few thousand they have saved. US citizens pay far more for cars and other items which contain steel than the few dollars we get in tariff income. You do not mess with the free market without cost.
What these senators also are saying is that they want the US consumer to pay more for their foreign goods. They want prices to rise and life-styles to diminish. They want to protect their voters from the forces of change. Why don’t we outlaw tractors? We could create lots of jobs if we had to plow fields behind a mule. Let’s legislate no more change in the US.
Today, we read in the Financial Times that foreign countries now own 46% of US foreign debt not owned by the Fed. The US trade deficit over the next two years will be over $1 trillion dollars, so foreign debt holding must rise to even greater proportion. The “good news” is that since the US federal deficit seems to be rising faster than our trade deficit, there will be plenty of US treasury bonds for the Chinese and the rest of Asia to buy.