New York Times columnist Paul Krugman published on Sunday his monthly column about China's dastardly currency policies. The column repeats many of Krugman's earlier comments about global "imbalances" and market "distortions," as well as his not-so-subtle demand that the U.S. Treasury Department label China a currency manipulator in its semi-annual report on the subject (not coincidentally due next month). Now, I've already expressed some serious doubts about Krugman's thoughts and intentions on the China currency issue, so I won't get into that again because, unlike PK, I can't get away with recycling my work. Instead, I want to focus on Krugman's new and bellicose policy recommendation for solving the China currency "problem":
Some still argue that we must reason gently with China, not confront it. But weâ??ve been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared â?? absurdly â?? that his nationâ??s currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies â??just for the purposes of increasing their own exports.â?
But if sweet reason wonâ??t work, whatâ??s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, itâ??s hard to see China changing its policies unless faced with the threat of similar action â?? except that this time the surcharge would have to be much larger, say 25 percent.
I donâ??t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the worldâ??s economic problems at a time when those problems are already very severe. Itâ??s time to take a stand.
Yes, you read that right. Former free trade guru and Nobel laureate in trade economics Paul Krugman just strongly advocated the unilateral imposition of 25% tariffs on all Chinese imports if China doesn't respond to U.S. demands to appreciate its currency by 20%-40%. Even I am shocked by this suggestion. Not only does it mean that Krugman, who also recently advocated carbon tariffs as a way to force developing countries to impose development-killing climate change policies, finally needs to tear up his free trader card, but it also represents one of the more short-sighted and absurd lines of reasoning that he's ever produced.
Indeed, by my count, Krugman's arguments for this 25% tariff fail from a historical, practical and economic perspective.
(1) Krugman completely distorts (or, to be kind, misreads) history. As Dan Drezner points out, that U.S.-Germany episode didn't quite unfold as Krugman claims:
It's certainly true that the dollar was overvalued back in 1971. What Krugman forgets to mention -- and see if this sounds familiar -- is that the Johnson and Nixon administrations contributed to this problem via a guns-and-butter fiscal policy. They pursued the Vietnam War, approved massive increases in social spending, and refused to raise taxes to pay for it. This macroeconomic policy created inflationary expectations and a "dollar glut." Foreign exchange markets to expect the dollar to depreciate over time. Other countries intervened to maintain the dollar's value -- not because they wanted to, but because they were complying with the Bretton Woods system of fixed exchange rates. Nixon only went off the dollar after the British Treasury came to the U.S. and wanted to convert all their dollar holdings into gold.
In other words, the United States was the rogue economic actor in 1971 -- not Japan or Germany.
So the U.S. in 1971 wasn't the U.S. of today - it was China. Minor detail! So much for that historical and theoretical justification for angry unilateralism, huh?
