US Trade with China



US Trade with China

1.0 Introduction

Our current trade institutions address illegal subsidies by levying import tariffs on imported subsidized goods. In theory when trade partners artificially suppress prices and export those underpriced goods to the United States, import tariffs should level the playing field by raising prices back up to natural market levels.

In theory these tariffs are lowered over time and finally eliminated as the trade partner phases out its subsidies.

Cheap Chinese manufacturing appears to have contributed to the price drop, so reducing the impact of Chinese prices on the U.S. market should slow the price decrease to a more sustainable rate and increase profit margins for U.S. manufacturers.

U.S. tariffs on Chinese solar panels would also help manufacturers in other countries that do not provide these subsidies, such as some in the European Union, because those manufacturers also export to the United States and compete for U.S. market share.

2.0 Background

The failure of the Treasury and the president to act does not prevent other policy makers from doing something to stop currency manipulation.

Congress should immediately pass legislation to bypass the failed Treasury foreign exchange review process, require the Treasury secretary to begin negotiations with these countries, and impose tariffs of at least 25% within 90 days if any country fails to revalue when identified by the Treasury as a currency manipulator.

In 2009, U.S. imports from China exceeded U.S. exports to that country by more than four to one.

The United States and other countries have tremendous leverage over China because it is so overdependent on exports, which support nearly one-third of China's GDP.

China's exports to the United States are far more important to its economy than they—or U.S. exports to China—are to the United States. China's exports to the United States, alone, accounted for $296 billion or 6.2% of its GDP in 2009.

All these materials are used to make products that are exported back to the United States. If China were to limit its imports of these commodities, it would only further reduce its exports to this country.

As Paul Krugman (2010) has pointed out, “Short-term U.S. interest rates wouldn't change: they're being kept near zero by the Fed, which won't raise rates until the unemployment rate comes down. Long-term rates might rise slightly, but they are mainly determined by market expectations of future short-term rates. Also, the Fed could offset any interest-rate impact of a Chinese pullback by expanding its own purchases of long-term bonds.”

More important, there are several reasons why a revaluation would actually benefit China.

First, a stronger yuan would help restrain inflationary pressures, which have been growing in China.

Second, it would increase the purchasing power of Chinese businesses and consumers.

It is important to note that a group of Chinese CEOs of state-controlled enterprises recently came out publicly in favor of a stronger yuan (Bloomberg 2010).

Finally, if China stopped intervening in the currency market, it could invest those resources in projects to meet pressing social needs, such as housing, ...