Battle4Liberty

The Chinese trade dilemma is now a campaign issue. Although the Obama Administration is filing a WTO case against China claiming at least $1 billion in government subsidies related to autos and auto parts, the White House has delayed making an official determination on China’s currency policy. Mitt Romney says he will immediately classify China as a currency manipulator if elected. I’ve discussed China trade issues in previous posts, but they’re worth revisiting in the context of the election.

For starters, Obama’s claim about the Chinese auto industry has merit, but the WTO case is preposterous. Indeed, the Chinese government has ownership positions in a number of automakers and suppliers, and its policies have favored Chinese firms over foreign companies. But our own bailout of GM has been followed by various government schemes to support the automaker (and the U.S. auto industry in general), from cash-for-clunkers to green energy grants to Volt subsidies. The U.S. government lacks the moral authority to address this issue at the moment.

Of course, China does manipulate its currency, pegging the yuan in part to the U.S. dollar. This lowers the price of Chinese goods in American markets, a positive for U.S. consumers but a negative for U.S. businesses. The extent to which this occurs is debatable, although economists have suggested that a free floating yuan would rise in value by 20% or more. To suggest that it doesn’t contribute to the plethora of Chinese goods on shelves of American retailers is nonsensical. But the currency issue should have been negotiated firmly years ago. Today, an entire global economy has been built on an artificially weak yuan.

Global trade makes economic sense as long as the governments involved play reasonably fair and are not hostile to the United States. Problems with China such as currency manipulation, state ownership and control of Chinese firms, and intellectual property rights protection must be addressed. Those who suggest that doing so will “spark a trade war” are dooming the U.S. to permanent trade disadvantage. The goal should be free trade, not protectionism. Smoot-Hawley taught us in 1930 that harsh, retaliatory trade legislation usually leads to tariffs and restrictions from our trading partners.

Beware of those who do not understand both sides of the global trade dilemma. Protectionists claim that they support free trade as long as it is fair, but their policy proposals are often highly restrictive and naive. Global trade is good for consumers and creates jobs for American exporters. Any way you slice it, a reduction in trade hurts our economy. On the other hand, some business leaders oppose any government action designed to address fairness issues. They are willing to overlook problems like an artificially weak Chinese currency because they fear retaliation from our trade partners.

We should insist on both free and fair trade. Romney appears to understand this balance and is calling for firm negotiations, not a trade war. While China should not be a scapegoat for our largely self-inflicted economic woes, there are serious trade issues that should be addressed. We can do better.