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Appreciating China’s Currency
China’s President Hu Jintau arrives in Washington today for a state visit, turning the spotlight once again on U.S.-China trade and China’s allegedly undervalued currency, the yuan. Not one to let such an opportunity go to waste, Sen. Charles Schumer (D-N.Y.) is introducing legislation that would threaten to impose duties on imports from China if the yuan does not appreciate quickly.
Count me skeptical that a more expensive yuan relative to the U.S. dollar would make much of a dent in our bilateral trade deficit with China, or that it would have any positive effect on U.S. economic growth and employment. But even if those assumptions were true, the big story is how much the yuan as already appreciated against the dollar.
It has been a mantra of Sen. Schumer and other critics of U.S.-China trade that the yuan is undervalued by 15 to 40 percent. They were saying that before the 2005 appreciation, and they’re saying that now, as though nothing has changed.
Yet a lot has changed. In nominal terms, the yuan appreciated by more than 20 percent between 2005 and 2008. That’s when China relaxed its hard peg with the dollar and allowed its currency to gradually appreciate. After holding the peg steady again during the recent financial turmoil, China has again allowed it to rise another 3 percent since last June.
The nominal rate is just part of the story, however. Price levels in the United States and China determine the real exchange rate–the actual amount of goods that can be bought with each currency. A big story in China recently is its rising inflation rate, which makes Chinese goods relatively more expensive at any given exchange rate. In this way, a relatively higher inflation rate in China compared to the United States acts in the same was as a nominal increase in the exchange rate of the yuan.
When you combine the effect of rising prices in China with the higher nominal value of the yuan, you get a double boost to the real exchange rate. According to a chart on the front page of this morning’s Wall Street Journal, the real value of the yuan has appreciated by 50 percent since the beginning of 2005. In early 2005, 100 Chinese yuan could be exchanged for about $12; today it can be exchanged for $18 (in real, inflation adjusted dollars).
Rather than complain, Sen. Schumer and his allies should congratulate themselves on achieving their goal of a much stronger yuan and a much weaker dollar, even if we are still waiting for the tonic effect they predicted it would have on jobs and growth.
Is Birthright Citizenship Challenge “Doomed”? Let’s Hope So
Yet another front has opened in the battle over illegal immigration, this one involving birthright citizenship. According to today’s New York Times and other news outlets, Republicans at the state and federal level are gearing up to re-open the question of whether children born in the United States to parents who are here illegally should be granted automatic citizenship under the 14th Amendment to the U.S. Constitution.
James Ho makes a strong case in this morning’s Wall Street Journal that the 14th Amendment as written after the Civil War was intended to include the children of resident aliens whatever their legal status. The former solicitor general of Texas, Ho describes a series of Supreme Court decisions since then that have consistently upheld the principle that birthright citizenship applies to the children of illegal immigrants. He offers this sobering advice to those who want to retest the case in court:
Opponents of birthright citizenship say that they want nothing more than a chance to relitigate the meaning of the 14th Amendment. But if that is so, state legislation is a poor strategy.
Determining U.S. citizenship is the unique province of the federal government. It does not take a constitutional expert to appreciate that we cannot have 50 different state laws governing who is a U.S. citizen. As a result, courts may very well strike down these state laws without even invoking the 14th Amendment. The entire enterprise appears doomed to failure.
At a Cato Hill Briefing event in October, I spelled out additional reasons why the principle of birthright citizenship has served our nation well since the Civil War amendments. Attorney Margaret Stock reviews the legal and constitutional arguments underpinning birthright citizenship, while I examine the practical policy arguments for not tampering with the established interpretation. (My segment starts at the 25:11 mark.)
Can a Tariff Wall Restore America’s Industrial Glory?
Did America become a great industrial power in the 19th century because of its high trade barriers? This is not just an academic question. Modern-day critics of trade, such as Pat Buchanan and Ian Fletcher, argue that the same tariff wall that made American great more than a century ago can bring back those days of industrial glory.
I did my best to debunk this flawed historical argument in Chapter 7 of Mad about Trade, but I’m delighted to see my free-trade buddy Don Boudreaux of George Mason University weigh in with an article in the new issue of The Freeman.
Under the title, “Tariffs and Freedom,” Don neatly dispels a number of myths surrounding that period in American economic history.
Are U.S. Multinationals to Blame for High Unemployment?
Many Americans believe the unemployment rate remains stubbornly high because U.S. multinational companies have been outsourcing and offshoring jobs to low-wage countries at the expense of jobs at home. And they believe this in part because politicians and the media tell them it’s so, even though it isn’t.
Consider this story today from the Associated Press under the provocative headline, “Where are the jobs? For many companies, overseas.”
Corporate profits are up. Stock prices are up. So why isn’t anyone hiring?
Actually, many American companies are–just maybe not in your town. They’re hiring overseas, where sales are surging and the pipeline of orders is fat.
More than half of the 15,000 people that Caterpillar Inc. has hired this year were outside the U.S. UPS is also hiring at a faster clip overseas. For both companies, sales in international markets are growing at least twice as fast as domestically.
The trend helps explain why unemployment remains high in the United States, edging up to 9.8 percent last month, even though companies are performing well: All but 4 percent of the top 500 U.S. corporations reported profits this year, and the stock market is close to its highest point since the 2008 financial meltdown.
But the jobs are going elsewhere. The Economic Policy Institute, a Washington think tank, says American companies have created 1.4 million jobs overseas this year, compared with less than 1 million in the U.S. The additional 1.4 million jobs would have lowered the U.S. unemployment rate to 8.9 percent, says Robert Scott, the institute’s senior international economist.
Where to start? First, look back at the reference to Caterpillar, the quintessential U.S. multinational company. If more than half of the employees the company has hired this year are outside the United States, doesn’t that imply that the company also hired workers within the United States, perhaps several thousand?
In fact, as I noted on p. 101 of my Cato book Mad about Trade, Caterpillar and other U.S. multinationals tend to hire workers at home when they are hiring workers abroad. When global business is good, employment tends to ramp up throughout a multinational company’s operations, whether in the United States or abroad. (Earlier this month the Dayton (Ohio) Daily News ran a story about Caterpillar hiring 600 new workers at a local distribution center.)
It is simply false to argue that, if U.S. multinationals did not add jobs to their operations abroad, those jobs would be created at home. The opposite is much closer to the truth. Over the past 30 years, the change in employment of U.S. multinationals in their U.S. parent operations and in their affiliates abroad has been positively and strongly correlated. When hiring grows abroad, it grows at home, and when it lags at home, it lags abroad.
And when U.S. companies do hire abroad, their aim is not typically to cut wage costs but to reach new customers (as I explained in an earlier op-ed). That’s why U.S. multinationals employ far more workers in high-wage Europe than in low-wage countries such as India and China. In fact, according to the most recent numbers from the U.S. Commerce Department, U.S. multinationals employed five times as many workers in Europe (4.82 million) in 2008 than they did in China (950,000).
If U.S. companies are forced to reduce their operations abroad in the name of fighting unemployment at home, they will be less able to compete in global markets and less able to expand production and employment in their domestic operations.
Free Trade’s “Peace Dividend”
“Peace on earth, good will toward men” is a phrase we associate with the Christmas season. One bit of good news that you will probably not see in the newspaper or on cable TV over the holiday is that the world in recent decades has actually been moving closer to that ideal, and free trade and globalization have played a role.
In its latest “Trade Fact of the Week,” the pro-trade Democratic Leadership Council reminds us that “The world has become more peaceful.”
Citing a recent report from the Human Security Center in British Colombia, the DLC memo notes that wars are less frequent and less bloody than in decades past. The average annual death toll from armed conflicts has been declining since the 1950s, from an average of 155,000 down to 17,000 in 2002-2008. None of the world’s “great powers” have clashed since the 1969 border conflict between Russia and China, and none of the major European powers have exchanged fire for 65 years—-the longest intervals of peace for centuries.
In Chapter 8 of my 2009 Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, I describe this phenomenon as “Free Trade’s ‘Peace Dividend’” (pp. 140-143). There are two main ways that globalization promotes peace: The growing network of global trade and investment has raised the cost of war, so that now if two nations go to war, they not only lose soldiers and tax dollars, they also lose markets and cause lasting damage to their economies. Globalization has also reduced the spoils of war by allowing people to acquire resources through peaceful exchange rather than conquest.
The DLC Trade Fact memo shares the credit with decolonization, the end of the Cold War, the spread of democracy, and peacekeeping missions, while also recognizing the contribution of economic openness:
[L]ower trade barriers, more open economic policies, more efficient logistics industries and better communications technology speed up and deepen integration across borders through trade and investment, strengthening mutual interests and reducing reasons for conflict. The [Human Security Center] report suggests that a 10 percent increase in FDI reduces a nation’s chance of international or civil war by about 3 percent, and that globalization reduces the reasons a country might want to fight:
“[T]he most effective path to prosperity in modern economies is through increasing productivity and international trade, not through seizing land and raw materials. In addition, the existence of an open global trading regime means it is nearly always cheaper to buy resources from overseas than to use force to acquire them.”
Eliminating all remaining trade barriers would be one of the best Christmas presents our politicians could give us.
Media Miss Real News in Latest Trade Report
This morning’s report from the U.S. Department of Commerce that the pesky trade deficit shrank unexpectedly in October is being hailed in the media as “good news” for the economy, while the real news behind the numbers remains buried.
According to the latest monthly trade report, exports of U.S. goods rose in October compared to September, while imports declined slightly. Rising exports are good news in anybody’s book, but according to the conventional Keynesian and mercantilist logic, falling imports must also be good for the economy because that means consumers are spending more on domestically produced goods, right? Wrong.
In the real world, that assumption is almost always false, as I did my best to document a few weeks back in an op-ed titled, “Are rising imports a boon or bane to the economy?”
The real news in the report is the spectacular rise of U.S. exports to China. Year to date, U.S. exports to China are up 34 percent compared to the same period in 2009. That compares to a 21 percent increase in U.S. exports to the rest of the world excluding China. China is now the no. 3 market for U.S. exports, behind only our NAFTA partners Canada and Mexico, and by far the fastest growing major market.
The politically inflammatory bilateral trade deficit with China is also up 20 percent so far this year, but our trade deficit with the rest of the world excluding China is up 38 percent.
Yet Sens. Chuck Schumer, D-N.Y., and Lindsey Graham, R-S.C., are still talking about pushing a bill during the lame-duck session that would authorized the same Commerce Department to assess duties on imports from China because of its undervalued currency. A cheaper Chinese currency relative to the U.S. dollar supposedly inhibits U.S. exports to China while tempting American consumers to buy even more of those useful consumer goods assembled in China. [For the record, U.S. imports from China so far this year have grown, too, but at a rate slightly below imports from the rest of the world.]
To anyone taking an objective look at the numbers, this morning’s trade report shows that whatever the wisdom of China’s currency policy, it has not been a real obstacle to robust U.S. export growth, nor has it fueled an extraordinary growth in our bilateral trade balance with China. Members of Congress should drop their obsession with China trade and move on to more urgent matters.
Are Tea Partiers Anti-trade?
Where will the new Tea-Party-backed members of Congress come down on trade issues, such as the newly revised trade agreement with South Korea or the next farm bill?
Those elected to the House are the biggest question marks because very few of them have had to think much about trade, never mind actually cast a vote on it. In an op-ed in the Philadelphia Inquirer this week, I try to discern what direction the new members will take the generally pro-trade Republican Party, and which direction they should take it in light of the movement’s free-market, limited-government principles.
For my full take, see “Are Tea Partiers Anti-trade?”
DREAM Act a Low-Risk, High-Return Option
In a perfect world, we wouldn’t need to consider bills such as the DREAM Act, approved by the House last evening and on tap for a vote in the Senate as early as today.
The Development, Relief and Education for Alien Minors Act would offer legal status to students who came to the United States illegally before they turned 16 and have lived here for more than five years. To gain legal status they would need to complete high school, and then two years of college or military service. Once implemented the act would legalize about 65,000 students a year.
If our immigration policy was more in line with what I’ve been advocating for years, we would not have the large population of illegal immigrants that we do today because more legal alternatives would have been available. And access to in-state tuition would not be such a big deal if our education policies more closely reflected the sound arguments of my colleagues at Cato’s Center for Educational Freedom. Alas, that is not the world we live in yet.
The DREAM Act would improve a less-than-ideal situation by legalizing a population that is primed to live the American dream, and is virtually guaranteed to bestow real blessings on our economy and society.
Critics of the DREAM Act, such as Rep. Dana Rohrbacher (R-CA), paint these kids as nothing but expensive liabilities and the act as nothing but a backdoor amnesty. Both charges are false.
Young immigrants eligible for the DREAM Act are a low-risk, high-return addition to America. Because they came here at a young age, they almost all speak English fluently and are at home in American society. The fact that they have completed high school and will be attending college makes it likely they and their descendants will pay more in taxes than they consume in government services during their lifetimes. With the U.S. birthrate hovering at the replacement level, these assimilated, immigrant students at the beginning of their careers will help the United States maintain a healthy growth rate in our workforce.
It is wrong to label the DREAM ACT “amnesty.” These kids did nothing wrong. In fact, most of them simply obeyed their parents when the family immigrated to the United States. They should not be punished for the actions of their parents.
The DREAM Act, like most other immigration-related bills, has become charged with partisanship. House Democrats voted overwhelmingly in favor of the bill last evening, Republicans lopsidedly against. Democratic leaders in Congress are certainly open to the charge that they are using the bill to attract Hispanic voters even though the chances of it passing the Senate and becoming law are, at the moment, slim. But Republicans are open to the more serious charge that they are ignoring the more optimistic and inclusive vision of our country articulated by former President Ronald Reagan.
How Capitalism Saved the Pilgrims
When I was growing up, my father would occasionally tell me the story around this time of year of how private property rights saved the Pilgrims from starvation.
When the Pilgrims first arrived in 1620, as my father told the story, they tried to live communally according to the spirit of the Mayflower Compact. What crops they grew were put in a common storehouse and then apportioned according to each family’s need. The small colony struggled to survive for two or three years until its leaders declared that every family henceforth would be responsible for growing its own food. The new system proved much superior at putting food on the table.
Years later, when I was writing editorials for the Colorado Springs Gazette, I would tell the story in print on Thanksgiving Day, this time quoting from Governor William Bradford’s first-hand account. One of my fellow editors objected to my version, claiming it was Squanto the friendly Indian who saved the Pilgrims by teaching them how to fertilize their crops with dead fish. We agreed to disagree and I stuck to my version.
Earlier this year, as I was reading Nathaniel Philbrick’s bestselling book, Mayflower: A Story of Courage, Community, and War (New York: Penguin Books, 2007, paperback edition), I came across a passage that weighs in decisively on our editorial dispute. It appears my father did know best after all.
From page 165 of Mayflower:
The fall of 1623 marked the end of Plymouth’s debilitating food shortages. For the last two planting seasons, the Pilgrims had grown crops communally–the approach first used at Jamestown and other English settlements. But as the disastrous harvest of the previous fall had shown, something drastic needed to be done to increase the annual yield.
In April, Bradford had decided that each household should be assigned its own plot to cultivate, with the understanding that each family kept whatever it grew. The change in attitude was stunning. Families were now willing to work much harder than they had ever worked before. In previous years, the men had tended the fields while the women tended the children at home. “The women now went willingly into the field,” Bradford wrote, “and took their little ones with them to set corn.” The Pilgrims had stumbled on the power of capitalism. Although the fortunes of the colony still teetered precariously in the years ahead, the inhabitants never again starved.
Among the many things I’m thankful for this week is that I live in a country that was founded on the solid rock of property rights and free markets.
Ban Spending Earmarks, But Not Tariff Cuts
Republican leaders in Congress announced Monday that they are all on board to ban spending “earmarks” when the newly elected Congress convenes in January. That is all to the good. While not a large share of the federal budget, the designation of tax dollars to fund specific pet projects in member districts has come to symbolize out-of-control spending in Washington.
Those same leaders should clarify that the earmark ban applies only to spending projects—not to the kind of tariff suspensions including in a recent miscellaneous tariff bill.
The U.S. Manufacturing Enhancement Act approved by Congress in July suspended tariffs on hundreds of imported items of special interest to U.S. manufacturers. House Republican leaders made the mistake earlier this year of including such tariff suspensions in an earmark ban they announced in March.
The overly broad definition of an earmark boxed the leadership into opposing a perfectly sensible trade bill. Despite the half-hearted opposition of the GOP leadership, the U.S. Manufacturing Enhancement Act passed overwhelmingly in the House on July 21, by a margin of 378-43, with Republicans supporting it by a 3-1 margin.
Most members of Congress already understood what the Cato Institute pointed out in a September 2010 study recommending reform of future miscellaneous tariff bills—that tariff cuts are not the same as spending earmarks. Here is what I wrote in the study about the difference between tariff cuts and the kind of spending earmarks that has angered voters:
Spending-bill earmarks distribute tax dollars not for any public purpose authorized under the U.S. Constitution, but rather to benefit a certain special interest or a specific city or district. They grant favors to a small group of beneficiaries at the public’s expense. In contrast, a tariff suspension repeals a narrow tax that falls disproportionately and unfairly on a small group of producers. Instead of granting a favor at the public’s expense, a tariff suspension relieves individual producers of a burden that falls on them and nobody else. Unlike a spending earmark, a tariff suspension creates no new claim on public resources. It does not expand the scope or size of government.
Including tariff suspensions in the moratorium is not a matter of curbing the power of lobbyists. There is a world of difference between lobbying for a $500,000 government grant for a project with narrow benefits, and lobbying to remove a $500,000 tax bill that only a handful of enterprises are required to pay. The former seeks an expansion of the government’s power and influence, the latter a reduction. Republicans who rightly complain about the growth of the federal government should be the first to embrace the suspension and repeal of hundreds of nuisance taxes distorting the economy and burdening American producers.
The new Congress may soon consider another miscellaneous tariff bill to further reduce discriminatory tariffs that impose real costs on U.S. companies trying to compete in global markets. Republican leaders should join with their Democratic counterparts in the new Congress to clarify that suspending or repealing unfair tariffs should not be banned but should be vigorously pursued.
President Obama Represents UAW Rather Than U.S. in Korea Trade Talks
This has been a tough month so far for President Obama and his policies.
After the “shellacking” that he, his party, and his domestic policies suffered at the hands of American voters last week, his international economic policies were no more popular among his counterparts at the G20 summit this week in Seoul, South Korea.
Even the sympathetic editors at the New York Times declared in a front-page (print edition) headline this morning: “Obama’s Economic View Is Rejected on World Stage: China, Britain and Germany Challenge U.S.—Trade Talks with Seoul Fail, Too.”
The other leaders at the summit were right to reject the president’s demands that China be singled out for its currency policies, as I’ve written before, and the South Korean government was right to reject his demands for changes in the U.S.-Korea trade agreement that has been waiting for more than three years for congressional approval.
Although not perfect, the U.S.-Korea agreement is a solid step forward. As my Cato colleague Doug Bandow wrote in a recent study, the agreement would sharply reduce trade barriers between our two nations while deepening our commercial and security ties with a key democratic ally in the Asian Pacific.
The Koreans rightly refused to substantially alter the sections of the agreement relating to automobiles. The agreement would eliminate tariffs on all automobile trade between the two countries. Ford, Chrysler, and the United Auto Workers union oppose the deal, claiming that it does not address non-tariff barriers that allegedly hinder U.S. exports to the Korean market.
As I posted in this space a few days ago, there are perfectly normal market reasons why Americans buy a lot more Korean cars than vice versa. The real agenda of Ford, Chrysler, and the UAW is not to gain greater access to the Korean market, but to prevent any greater access of their Korean competitors to the U.S. market.
The talks in Seoul this week reportedly foundered on the specific U.S. demand that Korea relax its emission and mileage standards so that U.S. automakers can more easily modify their cars for the Korean market. How ironic. It has become part of the Democratic mantra on trade that agreements must strengthen the environmental and labor standards of our trading partners. Yet here U.S. negotiators were strong-arming the Korean government to weaken its own standards while the Obama administration seeks to impose higher mileage and emission standards on cars sold in the United States.
There is still time to save the U.S.-Korea agreement and to present it to the potentially more trade-friendly Congress that will convene in January. But for now, President Obama has chosen to serve the narrow interests of two domestic automakers and their union rather than the overall economic and strategic interests of the American people.
Commercial Ties with India Are An Opportunity, Mr. President–Not A Problem
During his visit to India, President Obama should bury once and for all his divisive rhetoric about American companies shipping jobs overseas. Our growing commercial ties with India are a great opportunity, not a problem. U.S. exports to India have doubled in the past four years. American companies that have set up shop in India have helped to fuel demand in that country for U.S. products and services. The president should be celebrating rather than demonizing our deeper economic ties with India.
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