Bill to Whack China Passes

I'm not in favor of this one, but the senators sponsoring the bill forgot to ask me.

The legislation would allow US companies to seek anti-dumping duties on goods from any country that maintains a "fundamentally misaligned" exchange rate after being formally cited by the United States. At present, it is ostensibly targeted at China.

The supporters of the bill seem to believe that a faster appreciation in the yuan, the Chinese currency, is a panacea to the broadening US trade deficit with China or U.S. losses in manufacturing jobs.

However, their assumption not only flies in the face of huge and critical efforts China has made to reduce its external imbalances, but also misses the underlying cause of the soaring U.S. trade deficit.

The Chinese government has made it very clear with words and actions that the country is resolved to introduce greater flexibility into its foreign exchange regime at its own pace and reduce its external imbalances.

The Chinese government overstates its efforts to curb the trade imbalance. It has slightly modified the valuation of the yuan (as I argued earlier, don't expect any significant changes there), and it has changed the VAT structure on a number of export items. However, the government isn't going to do anything drastic that would discourage business from China.

That said, this bill isn't the answer to US manufacturer's complaints. Manufacturing in China is cheaper than manufacturing in the United States for a variety of fairly obvious reasons. Currency valuation is not the only one. Labor, environmental, and regulatory costs are all significantly less than the US.

Labor costs will adjust naturally as skill sets grow and more businesses develop. But environment costs and regulatory costs are opportunities for the US. We can't force China to clean up its environment. But international pressure and persistent pressure in the news keeps the topic in the foreground and reasonable low cost solutions will be well received. The United Nations loves to whine about Kyoto. Turn them loose on China with some reasonable solutions (taking into consideration it is the UN we are talking about). Chinese citizens are not oblivious to the environment problems either.

The better opportunity lies in the regulatory void. Goods from China are cheap because they are cheaply made, often with inferior materials and craftsmanship. Importers should be required to internalize the costs of quality compliance. No one wants to see the US government grow to a size where it can afford to monitor the quality of imported Chinese merchandise. Importers should be required to provide evidence of the content of the materials being imported and their functionality. In many cases with will add significantly to the cost of the goods and it serves a positive function.