ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Friday, June 24, 2005

Kudlow on China

A Must Read column from Larry Kudlow.

by the way, what happens to a person when they get into the Senate? All of a sudden they start playing to the cameras... something about being 1 of a hundred, I s'pose.

The Insanity of Smoot Schumer and Hawley Graham


Larry Kudlow
June 24, 2005

If a store is selling quality products at low prices, why would anyone want to shut it down? This rhetorical question was asked by economist Arthur Laffer last week in connection to an unprecedented attack on China trade by numerous U.S. senators. In response to the China bashing, the stock market plunged.

How fitting that such a misguided approach to both the economy and national security would come on the 75th anniversary of the infamous Smoot-Hawley tariff bill. According to economist Thomas Sowell, that massive tariff helped trigger the Great Depression, with U.S. unemployment rising from 9 percent in 1930 to 16 percent in 1931 and 25 percent in 1932.

Today, senators Smoot Schumer and Hawley Graham have proposed a 27.5 percent tariff on Chinese imports unless China raises significantly the value of its yuan currency. The senators seem to be angry at a rising bilateral trade deficit resulting from Chinese imports to the U.S. But so what? Free trade only empowers our consumers. In the last couple of years the U.S. has created about 3.5 million new jobs, the unemployment rate is only 5.1 percent, and the nation’s GDP is expanding at a 4.5 percent pace. Meanwhile, China’s economy continues to climb near a 10 percent rate, with the heretofore impoverished Chinese population slowly but surely entering the modern realm of rising global prosperity.

Schumer and Graham believe that a higher yuan would narrow the trade deficit. But Alan Greenspan completely disagrees. The Fed chairman told a Senate panel that “some observers mistakenly believe that a marked increase in the exchange value of the Chinese renminbi [yuan] relative to the U.S. dollar would significantly increase manufacturing activity and jobs in the United States. … I am aware of no credible evidence that supports such a conclusion.”

More, Art Laffer argues that a stable yuan linked to the dollar has promoted strong economic growth at low inflation for the U.S., China, and the rest of the world. “We have outsourced Alan Greenspan to China,” said Laffer, “and that’s a good thing for everyone.”

Think of the dollar-link as China’s gold standard, stabilizing the value of its currency and attracting foreign investment inflows to rebuild its economy. Destabilizing the yuan would be just as disastrous as the so-called Asian contagion of 1997-98 when Robert Rubin and the IMF forced the smaller Asian Tiger economies to de-link from the greenback. That only led to recession in the Pac Rim and intense deflation around the world.

Ironically, since the dollar has been floating freely, the dollar-linked yuan has also floated compared to a market basket of currencies. Between 1995 and 2001 the yuan-dollar appreciated by nearly 50 percent and in recent years has fallen by about 30 percent. Both the U.S. and China adjusted internally to deflation and inflation. But the common link between the two has given the yuan global financial confidence while at the same time giving the U.S. enormous leverage over the Chinese economy. What’s wrong with that? We buy their goods and they invest in our country through the purchase of Treasury bonds and more recently through direct investment in large U.S-based corporations (like Maytag and Unocal).

Unlike the sale of defense-related technologies there’s no national security problem here. American firms like Anheuser-Busch, the Bank of America, and numerous tech firms are all investing in China. This is free and open trade for the mutual benefit of both nations. Trade and monetary cooperation also provide the basis for national security cooperation, especially in the areas of stopping nuclear proliferation in North Korea and protecting a free Taiwan.

Clearly China is not perfect, though it has reduced government ownership of the economy from 90 percent twenty years ago to about 30 percent today, according to Laffer. Yes, the communist government in Beijing prevents free elections and free speech, continues to persecute religious groups, and has a record of pirating music and software as well as other intellectual property. But according to a recent study by the Council on Foreign Relations, China has also changed 2,600 legal statutes to comply with World Trade Organization rules.

The freedom to trade and the freedom to choose are central to the economic freedom that’s necessary for nations to grow and prosper. Centuries of economic history confirm this, and yet some people seem to want to repeat the worst mistakes of the past. Open trade and currency stability enormously benefit both the U.S. and China and may well lead to improved international relations. Why do senators Smoot Schumer and Hawley Graham want to disrupt the 21st century march to peace and prosperity?

Cutting off your nose to spite your face makes no sense for individuals, nor for nations. Hasn’t history taught us that free trade is part of the solution -- not the problem?

Now, the biggest problem with China is its One Country, Two Systems approach - free markets as long as the government allows it. The biggest problem with this is that it is unsustainable in the long run. At some point the authoritarian government will either collapse or the free market economy will collapse. But whether they're currency is pegged to the US Dollar or not is the least of our concerns.

And as I asked above... what's up with Graham? If you look across the aisle and see Shumer as your partner on something, chances are you're making a big mistake. Lieberman? Go for it... there are any number of other Dems that are closer to the center than Shumer!!

Your Co-Conspirator,
ARC: St Wendeler