Schumer Undervalues Trade with China

Article excerpt


The drums of a trade war with China continue to beat in Congress even after the Chinese government announced earlier this month that it will allow the yuan to resume appreciating against the U.S. dollar.

Led by Sen. Charles E. Schumer, New York Democrat, congressional critics of China's currency policy assert that the yuan is intentionally undervalued by as much as 40 percent. They argue that the undervalued currency makes Chinese goods artificially cheap in the U.S. market, hurting U.S. manufacturers, while it stifles U.S. exports to China, fueling our big bilateral trade deficit.

There's an element of truth to all of that. China's central bank does tightly manage the value of its currency in the foreign-exchange market, as do most other less-developed nations. An undervalued currency does make a nation's exports more competitive while making imports more expensive. But the claims made by the critics are wildly overvalued in the debate and do not justify any resort to higher tariffs against Chinese goods.

Exchange rates have only limited effects on bilateral trade balances and can be swamped by more fundamental factors. We run a large bilateral deficit with China not because of an undervalued yuan, but because China specializes in making consumer goods - such as shoes, clothing, toys and household appliances - that American consumers love to buy. Because of our low national savings rate, we in turn offer attractive assets, such as Treasury bills, that the Chinese are equally eager to buy from us.

For a number of reasons unrelated to exchange rates, the growth of our trade deficit with China has actually slowed in the past year. According to the latest monthly report from the U.S. Department of Commerce, our trade deficit with China grew only 6 percent in the first four months of 2010 compared with the same period last year, from $67 billion to $71 billion. That compares with a 46 percent jump in our trade deficit with all other countries, from $78 billion to $114 billion.

China's manipulated currency has not blunted U.S. exports to China, nor unleashed a flood of imports. In the first four months of 2010, U.S. exports of goods and services to China were up 41 percent, twice the rate of growth of exports to the rest of the world excluding China. …