HRC & Obama: Death to China!

No, no, no! Please, no more of this!

Hillary Clinton and Barack Obama, the frontrunners for the Democratic presidential nomination, have agreed to co-sponsor legislation that would levy punitive duties on Chinese goods to cajole Beijing into revaluing its currency, according to aides.

Okay, the economic logic of this is absurd. Presumably, Sens Clinton and Obama are concerned about job loss in American industrial sectors, and China makes an easy political target. It makes political sense to express concern: Pennsylvania and Ohio are swing states, and Michigan is also up for grabs. Some good ole' fashioned populism could help their campaigns, especially in a general election.

But the economics is just silly. First of all, unemployment levels have remained very low in the U.S. In fact, they've been surprisingly low. Our median wages continue to increase, while consumption inequality has remained mostly constant. The things we mainly import from China are products of unskilled labor industries which don't exist in America any more (e.g. shoes, clothes, toys), so any significant employment gains are unlikely.

Not only that, but the U.S. has a pretty severe trade deficit with China. Which means that we import more from them than we export. If China raises the value of its currency, then our imports become more expensive. So... our trade deficit will increase, or else our imports will go down. If our imports from China go down, then our standards of living go down. In either case, inflation increases with the price level, and the FED has to further raise interest rates (or, at least not lower them) to keep inflation in check. This causes business investment to decrease, which causes future economic growth to recede, and also lowers domestic employment. Meanwhile, the incidence of the tariff tax would be regressive, as low-income people are the ones most reliant on cheap imports. The poor Walmart shopper would be hurt the most.

If China is devaluing their currency, then they are effectively subsidizing American consumption of the goods they produce. In other words, China is transferring money from themselves to us. They are giving us money for nothing. We should be thanking them... not threatening them.

So what would these tariffs accomplish? They would raise the costs of living of American consumers, eliminate the surplus gains we are getting from trade with China, and eliminate the surplus gains we are getting from China's devalued currency. Not only that, but it would jeopardize political relations with China, which will become more and more important over the coming years. It's a bad policy, in every way.

So no surprise that a few presidential hopefuls would be proposing it.

UPDATE: Brad DeLong, former Deputy Assistant Secretary of the Treasury under Pres. Clinton, and strong Democratic supporter, doesn't like the policy proposal either:

Of course, then the candidates will be attacking US consumers (who will pay higher prices for imports), workers in the construction industry, US borrowers (who will then pay higher interest rates to domestic and foreign creditors), and US homeowners (who will see the higher interest rates push down housing prices and reduce their equity). The net short-run effect is surely a minus--it's not as though we desperately need to swap construction jobs for manufacturing jobs right now, and we surely don't need a more-rapid decline in housing prices right now.

But then he says something interesting:

In the long run of three to five years, yes: The renminbi needs to become worth a lot more (primarily for China's sake). Pressure on China to adopt better policies is helpful (provided we don't shoot ourselves in the foot). But this strikes me as a classic threat to shoot ourselves in the foot: it is not a good policy move on either Obama's or Rodham Clinton's part.

If the RMB needs to appreciate for China's sake, then that supports my original point: a rise in the value of the yuan will be detrimental for American consumer in the short or long run. If you want to make the case that appreciation of the yuan would benefit Chinese, then be my guest. But if you want to argue that appreciation of the yuan would benefit Americans... then you've got a lot of evidence and theory to overcome.