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What Morons Where?

In a followup to his post on the Bush administration's new seriousness, Dan Drezner appears to contrast the Bush administration's approach with that of "trade morons like Senator Schumer." New York's senior Senator, you'll recall, wants to slap a "27.5 per cent tariff on all Chinese imports if China does not revalue in the next six months." I'll heartily agree that this is moronic, but I think that any standard under which this is a bad idea, the Bush administration's approach is equally moronic. One big virtue of the Schumer Plan is that you could see it working. A 27.5 percent tariff really might get China to devalue its currency. One big problem with the Schumer Plan is that if China did devalue its currency, the results would like be catastrophic for the United States. But. Insofar as that's what's wrong with the Schumer Plan, the Bush Plan is no better.

What I think's gotten Dan bothered about the Schumer Plan is that it involves a big tarriff and tarriffs are a no-no among the great and the good. And I agree. But by whatever mercantilist logic trying to force China to devalue its currency is a good idea, imposing tarriffs if they don't devalue is an equally good idea. The complaint about the Chinese currency, after all, is that it makes Chinese goods too cheap. If revaluing the Yuan upwards is a good idea, that must be because it would be a good idea to make Chinese goods more expensive. If that's a good idea, then it's an idea that could be easily implemented by slapping a special 27.5 percent tax on Chinese goods. Which is what Schumer is proposing. Now I think this isn't a good idea, but if it isn't a good idea then it's not a good idea to seek revaluation either. Thus the Bush Plan is equally moronic. But. The Bush Plan has the virtue of being exceedingly unlikely to work. If the Bushies are smart, this is the plan -- head off political pressure for bad China policy by implementing equally bad, but almost certain to fail, China policy. If that's right, though, the danger is that trying this instead of confronting the Seate directly starts a bipartisan bidding war to adopt the dumbest possible China policy.

April 18, 2005 | Permalink

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Comments

Hmmm, but *floating* the yuan, which is what the Bush admin is pushing now as opposed to a state mandated revalue would at least have the virtue of fexibility in the future, whereas a 27.5% tariff is likely to be forever once imposed, whatever China does.

Posted by: rd | Apr 18, 2005 6:14:12 PM

"I'll heartily agree that this is moronic"

I'm not sold on the emerging conventional wisdom that it would be bad for the US if China were to float its currency.

Eventually, the Yuan is going to float and reach something approaching it's true value. Why not do that now? It seems the longer this inevitability is delayed, the greater the dislocations will be when it happens, and the greater the economic distortions in the meantime.

If we believe in free trade, we ought to believe in free trade of currencies...

Posted by: Petey | Apr 18, 2005 6:16:59 PM

Eventually, the Yuan is going to float and reach something approaching it's true value. Why not do that now? It seems the longer this inevitability is delayed, the greater the dislocations will be when it happens, and the greater the economic distortions in the meantime.

Well, one might believe that eventually the real value of the Yuan might trend back toward -- even to -- its nominal value. The least disruptive time for a float would be at the closest approach. So if you don't believe that the Yuan's real value is as close as it will ever get to its nominal value without a float, there is no reason to believe that a float now is desirable.

If we believe in free trade, we ought to believe in free trade of currencies...

And free movement of people (who are both consumers and laborers, after all) and all kinds of other things that so-called "free traders" manifestly do not believe in.

Posted by: cmdicely | Apr 18, 2005 6:29:54 PM

And BTW, can any explainer out there fill me in on whether it's the Yuan or the Renminbi?

Posted by: Petey | Apr 18, 2005 6:38:19 PM

And whaddabout Singapore, S. Korea, Malaysia, Thailand and Taiwan?

That's why this nonsense won't really do much.

Posted by: mumon | Apr 18, 2005 6:44:21 PM

So the next question is why is Tim Adams being so intentionally tone deaf? Hint incompetence is not a factor. You don't need to be Brad DeLong to comprehend the crazy game of chicken that Adams appears to be starting. What is less clear is any rational or even irrational finance based motive for his activity. Which would lead one to cast a wider net...

Posted by: patience | Apr 18, 2005 7:01:38 PM

Now, a clever man would put the poison into his own goblet, because he would know that only a great fool would reach for what he was given. I'm not a great fool, so I can clearly not choose the wine in front of you. But you must have known I was not a great fool; you would have counted on it, so I can clearly not choose the wine in front of me.

Posted by: Dan Ryan | Apr 18, 2005 7:15:00 PM

My point being - there must be an easier way to demonstrate that Bush is a moron.

Posted by: Dan Ryan | Apr 18, 2005 7:15:57 PM

The currency is officially called the "renminbi," i.e. "the people's currency. "Yuan" is basically the formal word for "dollar" (the more colloquial and far more common word being "kuai"). In Taiwan people use the same terminology in (i.e. yuan and kuai) but the currency is called the "Taibi" or "New Taiwan Dollar" (NT) in English. Trust me, this is all much better than pre-1994 when the PRC had an entirely different, and rarely used, currency for foreigners, called "waihuijuan" or "Foreign Exchange Certificates" (FEC), but that's a much longer story.

Posted by: Happy Fishes | Apr 18, 2005 7:22:48 PM

"The currency is officially called the "renminbi," i.e. "the people's currency. "Yuan" is basically the formal word for "dollar"

I've heard this explanation before, but I still don't get it.

If yuan = dollar, then what does renminbi equal?

Posted by: Petey | Apr 18, 2005 7:27:05 PM

I believe that renminbi is also "dollar" - it is the term for Chinese currency. Yuan is a unit, like "cent" is a unit of US currency (the dollar). (Chinese also have a "cent" - the jiao; we just have the same word for the currency and for the main unit.)

Posted by: Al | Apr 18, 2005 7:36:56 PM

If yuan = dollar, then what does renminbi equal?

As I understand it, it equals something parrallel to, loosely, "US Currency" or "Federal Reserve Note".

I've seen some references to, as an illustration, "the renminbi yuan". Renminbi is the currency system, yuan is the unit.

Again, this is just my understanding.

Posted by: cmdicely | Apr 18, 2005 7:38:33 PM

And I'm really great at screwing up blockquote tags...

Posted by: cmdicely | Apr 18, 2005 7:39:36 PM

Matt,

You write "devalue" through your entire post. This is exactly the opposite of what would happen if the renmibi was _revalued_. The dollar is the thing that is artificially high relative to the renmibi.

Posted by: nitpicker | Apr 18, 2005 7:44:44 PM

Nitpicker beat me to it. Yes, it is the dollar, not the yuan, which would be devalued.

China would lose some momentum for its export machine, but it might well gain some purchasing power for its import hunger. A yuan worth more relative to the dollar would buy more oil, more wheat, etc., while the U.S., a big competitor in world commodity markets would be disadvantaged.

Americans should be wondering about the current spat between Japan and China, over textbooks. Chinese nationalist hostility against Japan is being pumped up; China and Japan are slowly contending over oil prospecting in the South China Sea, where China claims all, and every other neighbor counterclaims something. Japan is, by far, the biggest buyer and holder of U.S. treasury securities. If China moves on the dollar, will Japan follow suit?

How much a revaluation hurts China will depend on whether Japan, Korea, etc. follow suit quickly.

Posted by: Bruce Wilder | Apr 18, 2005 8:05:12 PM

If yuan = dollar, then what does renminbi equal

Renminbi specifies the specific currency, like saying "American Dollars" as opposed to "Canadian Dollars." In Chinese, the USA is called "Mei Guo". US Dollars are called (IIRC) "Mei Yuan."

The "kuai" part comes in because in the same way english has enumerating terms like "5 sheets of paper" or "10 pieces of gold," kuai is that "enumerating term" for currency. So 10 Yuan would be called "10 kuai yuan" in Chinese, or simply "10 kuai."

Posted by: Constantine | Apr 18, 2005 8:30:06 PM

For what it's worth, the problem is that using a trade policy tool in this situation is likely to lead to special interest capture.

Posted by: Guy | Apr 18, 2005 8:39:10 PM

To continue this admittedly less than fascinating line of discussion, "Renminbi" is indeed the name of the currency. If one wanted to be clear about a price that might be in US dollars or RMB, one would said, "X kuai renminbi." "Yuan" is only really used in two contexts: when clerks in higher-end stores give the price of things and in giving prices in written form. One would NEVER write "X kuai" unless representing speech. It certainly wouldn't appear on a price tag. Yes, "kuai" is a counter technically meaning a piece or lump of something, but it has now become the oral equivalent of "yuan" (and is defined as such in Chinese-Chinese dictionaries). In 3 years in the PRC and Taiwan I have never heard anyone use "kuai" and "yuan" together, as in "X kuai yuan." Needless to say, there are many additional slang terms for both Chinese and US money.

Posted by: Happy Fishes | Apr 18, 2005 9:13:03 PM

Interestingly the chinese have already decided to slowly float their currency, but the discussion of the mechanics by which this will occur seems to only be taking place in the Mainland financial press. The plan, as I last heard about it, was to start allowing the RMB to fluxcuate by about two percent and to gradually allow that rate to increase over time to a maximum level of about 25%.

In contrast to what Matt was proposing, there is one advantage of a devalued Chinese currency, enforcement. With an across the board tarriff hike of 27.5% there would be enough of an incentive to beat the system that we would see a lot of transhipments of Chinese goods through third parties, such as Mexico, with minor packaging or assembly activities along the way. And if you don't think the chinese would try something like that, then you're underestimating the trickiness of both the Chinese and their biggest American customer, Wal-Mart. At least with a floating currency you can't excape the market.

Ultimately, at the moment we should be thanking the Chinese for propping up the $$'s value. Because of our reliance on imports, a quick drop in the dollars value, among other things, would mean an acorss the board drop in spending power almost like a national paycut.

Posted by: Nate | Apr 18, 2005 9:50:39 PM

MY read in an economics textbook that free trade is good. Therefore, it is.

Posted by: eric | Apr 18, 2005 9:55:33 PM

Have some compassion, Matt. There are people who live in this country and support themselves in ways that are detrimentally affected by a free trade policy with China.

At least think about that.

In Washington, you are pretty far removed, and so am I (elsewhere), but have some fu**ing compassion, man! It's all numbers to you.

Posted by: eric | Apr 18, 2005 10:06:54 PM

"And free movement of people (who are both consumers and laborers, after all) and all kinds of other things that so-called "free traders" manifestly do not believe in. "

Allow me to pipe in to say that I believe that labor should be much freer than it is now.

Posted by: praktike | Apr 18, 2005 10:27:18 PM

The Chinese are doing us a favor by supporting the dollar. Essentially they are giving us stuff in exchange for dollars, which the Fed can create in unlimited supply. We're getting a good deal.

The pain for our economy will happen when the support from Asia stops.

Posted by: Half Sigma | Apr 18, 2005 10:32:28 PM

Pardon me for spoiling the party, but why is free trade always a good idea? Don't most countries, including 1st world ones, NOT follow strict free trade principles? Why is the argument that there is a currently a "race to the bottom" inaccurate?

I am persuadable on this subject. But I'd like to hear a real argument rather than "everyone knows free trade is good." Because "everyone" knew that the world was flat, too.

Posted by: publius | Apr 18, 2005 10:36:31 PM

I posted this elsewhere ...

As an investor, why should I not take some large % of my
american dollar derived investemnts and buy chinese
currency with them?
Scenario 1: Status quo: chinese to not either float or
revalue their exchange rate, and I lose
my risk free rate of return on those assets
( i lose tbill rate or whatever)
Scenario 2: Chinese revalue to +10 or +20% next week,
Quite a nice pop for a week

Scenario 3: Chinese 'float' their currency, and i get
a 10 to 40+% return- quite an amazing
return, all my friends think i am a
brilliant!

Scenario 4: They float it and it goes down! bummer.

Scenario 1, 2 or 3 seem likely, so there is very
little down side risk, and quite a nice upside.

Scenario 4: dont think that is likely.

Why isnt the investment world all a twitter with this
idea? Am i missing something?

Posted by: randal | Apr 18, 2005 10:49:08 PM

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