THE UTTER FOLLY OF CHINA-BASHING

Except in the administration, opinion in Washington is hardening on China's currency. Earlier this month, as the Treasury declined to name China a "currency manipulator" in its twice-yearly report on the matter to Congress, a new China-bashing law was put before the Senate. This measure, introduced by Democrats Max Baucus and Charles Schumer and Republicans Charles Grassley and Lindsey Graham, proposes to treat China's currency undervaluation as an illicit subsidy and seek redress through anti-dumping duties and other sanctions.

The bill has wide support on Capitol Hill – enough, the sponsors hope, to overcome a presidential veto. More surprising, perhaps, are the many calls for confrontation from disinterested economic experts.

The normally consensus-seeking Peterson Institute, for instance, is seething with impatience. In congressional testimony last month its director, Fred Bergsten, called for a new US strategy and recommended that this include a complaint at the World Trade Organisation "against China's currency intervention as an export subsidy". Mr Bergsten reminded the committee that Ben Bernanke, chairman of the Federal Reserve, had characterised China's currency policy that way in Beijing last December. (Mr Bernanke's prepared text did use the term "export subsidy", but in the speech as delivered it was cut. Back home, the excision served to underline the point rather than erase it.) 

Sure enough, the new China-bashing law follows Mr Bergsten's advice. China, it says, is an economic outlaw and must be brought to book.

So much is wrong with this approach that it is hard to know where to start. To begin with, an aggressive posture is unlikely to force China to change. The best argument for a moderate appreciation of the renminbi is that it would serve China's interests. If China's leaders are not persuaded of that, intemperate foreign demands are unlikely to change their minds.

Put that aside, though, and suppose that China did capitulate and let the renminbi appreciate briskly. What would that do to America's current account deficit? The answer is: not much. Morris Goldstein, another Peterson Institute hawk on China, acknowledges in a recent working paper* that the US economy is running at full employment, so if China's manipulated currency is exporting unemployment, those particular exports must be going somewhere else. Moreover, as Mr Goldstein points out, the renminbi's weight in the trade-weighted dollar index is just 15 per cent. A 20 per cent, appreciation would provide a meagre 3 per cent devaluation of the trade-weighted dollar. That would improve the US current account deficit, which was $850bn last year, by maybe $50bn.

Mr Goldstein says an appreciation of the renminbi might pull some other Asian exchange rates with it. That would help. A 25 per cent real appreciation against the dollar in China, Japan and the rest of emerging Asia "would probably improve the US current account position by roughly $130bn to $180bn". Suppose, then, that all this happened. Even under all Mr Goldstein's favourable assumptions America's current account deficit would be trimmed to between $670bn and $720bn. The problem is not exactly solved.

Mr Bergsten, Mr Goldstein and every other competent analyst note that a meaningful improvement in the US current account deficit will require higher private saving and a smaller budget deficit at home – variables that, unlike China's currency policy, are under the control of the US Congress. Why then give so much greater emphasis to what China needs to do? Perhaps the China-bashers think that Beijing is more susceptible to US threats than Congress is to elementary economics. Come to think of it, that might be a close call.

A quite different argument is often advanced for increasing pressure on China: that the US public will turn protectionist otherwise. Unless China is perceived to be playing fair in international trade, it is said, public opinion will demand new import barriers. For the sake of liberal trade, in other words, it is necessary to threaten China with antidumping duties and quite possibly to impose them.

At the very least, this is a paradoxical point of view – like advocating gin to curb one's appetite for alcohol. In fact it is even more absurd than it seems. Protectionist sentiment in the US is driven, in part, by the current account deficit, so it is true that measures that reduce the deficit, including an appreciation of the renminbi, would lessen the demand for import barriers. However, protectionist sentiment is also fuelled, in a far more direct way, by the account of the economy that the political class feeds to voters. What this bill tells the US public is that the flood of imports, the external deficit and the resulting downward pressure on wages in some industries (no need to dwell on the downward pressure on prices and the improvement in overall living standards that those imports also provide) are mainly China's fault.

One reason to contradict this account is that it is wrong. Another reason, for those who need another, is that leaving it unchallenged – let alone affirming it – will indeed make a turn towards protectionism more likely.

* A (Lack of) Progress Report on China's Exchange Rate Policies. www.petersoninstitute.org