The Obama Administration and many in Congress are actively pursuing policies to pressure China into inflating the value of its currency, the Renminbi (RMB). According to the Wall Street Journal, Senator Chuck Schumer “warned the Senate would soon press ahead with legislation that would penalize China and other countries that maintain artificially low currencies.” Paul Krugman says that the U.S. must take a stand against China, even recommending a surcharge on Chinese imports. If Dr. Krugman, Senator Schumer, and the Administration are successful, the affects on U.S. economy would be disastrous.
The core of their argument stems from their desire to reduce the U.S.-China trade deficit. Many believe that appreciating the value of the RMB would increase U.S. exports to China, therefore reducing the deficit. However, the following graph from the Cato Institute paints a different picture.+
While Figure 1 shows that U.S. exports did increase slightly when the RMB appreciated in 2005 and 2006, they also decreased significantly 2007 and 2008. The RMB appreciated 4.7% in 2007 and 9.5% in 2008 more than the 2.8% increase in 2006. If appreciating the Renminbi leads to more exporting, the export levels in ’07 & ’08 should have been much higher.
Moreover, Chinese products are cheap because the RMB is undervalued. Making China appreciate the RMB even further would lead to inflation, thereby reducing the real income of a large portion of U.S. consumers. This would disproportionately hurt the poor because they are the most likely to buy Chinese products.
Consumers wouldn’t be the only ones affected. According to Ambassador Terry Miller of the Heritage Foundation, “the measures proposed by some in Congress to pressure the Chinese to inflate the value of their currency would help some Americans…and hurt many others, including producers who use Chinese imports in their U.S. production processes.” Increasing the RMB’s value would force companies to raise prices on their goods, making them less competitive abroad.
What history has shown is that protectionist policies don’t work, especially during economic downturns. Congress and the Administration must resist the urge to meddle with the Chinese currency, because it’s America that will suffer, not China.