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Democracy & Technology Blog Schizoid trade policy?

What’s going on? Last week the U.S. Trade Representative Rob Portman unveiled a comprehensive review of U.S.-China trade relations and our policy toward the Middle Kingdom. The report acknowledges the many benefits that flow from trade with China. It also announces new steps to strengthen our ability to monitor and affect China’s compliance with intellectual property laws and WTO rules. So far, so good. The report even stays away from the contentious issue of the supposedly undervalued Chinese currency, the yuan. The word “yuan” is not even mentioned in the long report. I thought this was a real breakthrough in U.S. policy toward China, showing a more nuanced and sophisticated view of the relationship, one that might actually get results in the areas where China actually is doing some harm, like IP. The free-traders at the U.S. Chamber of Commerce hailed the report.
Then today on the front page of The Wall Street Journal‘s website, we see that the U.S. Treasury is contemplating — yet again — labeling China a “currency manipulator.” (See more here and here.) Such a label would set off a chain of events of special reports and meetings to decide what to “do to China” for the sin of outsourcing its monetary policy to our Federal Reserve. Worse, such a label would fan the already spreading flames of protectionism in the U.S. Congress, where lawmakers toss around catastrophic proposals for 27.5% tariffs as if they are only a little more consequential than earmarks or pork.
It seems last week’s USTR report may not have been the inauguration of a new, smarter China policy, as I had thought, but the opening salvo of a new anti-China campaign ahead of President Hu Jintao’s April U.S. visit. Surely, dangling the “manipulator” label out there could be a negotiating strategy, but as we all know, sometimes bluffs get called. Then what? This is the dangerous path that could lead to a trade war. I suppose some of this has even been pre-negotiated with Beijing — we drop the “manipulator” label in exchange for better IP enforcement — but even so, the constant erroneous suggestion by our Treasury that China is stealing wealth from the U.S. using a clever currency trick does great harm by giving credibility to the arguments of the protectionists. If policymakers believe the yuan is too weak, then they must understand the dollar is similarly weak. If they think the Chinese currency is being “manipulated,” they should look to the group conducting Chinese monetary policy, namely Alan Greenspan and now Ben Bernanke.
This is a risky high-wire act. It could be madness. I hope we know what we’re doing.
-Bret Swanson

Bret Swanson

Bret Swanson is a Senior Fellow at Seattle's Discovery Institute, where he researches technology and economics and contributes to the Disco-Tech blog. He is currently writing a book on the abundance of the world economy, focusing on the Chinese boom and developing a new concept linking economics and information theory. Swanson writes frequently for the editorial page of The Wall Street Journal on topics ranging from broadband communications to monetary policy.