Published: October 23, 2012
Less than a year into a new administration, the nation’s trade deficit is soaring. Manufacturers are complaining bitterly that an overvalued dollar is destroying the economy, driving businesses abroad. Congress is bubbling with proposals to punish countries that are flooding the United States with cheaper exports.
The gimlet-eyed realists in the new administration decide it is time to get tough, and it works. Within four years, the currencies of our main trading partners have risen sharply against the dollar; the exchange rate of our main Asian rival has jumped by a third. The trade deficit starts to recede. America — undisputed leader of the free world — gets to carve one more notch in its belt.
This is the type of success Mitt Romney hoped to conjure up during the foreign policy debate on Monday night when he promised to get tough on China from “Day 1,” designating China a currency manipulator and opening the door for trade sanctions. It is also the image President Obama wanted to convey when he countered that he has been twice as tough on China as his predecessor, George W. Bush.
The vignette, however, is old.
It comes from Ronald Reagan’s second term, when Japan rather than China inspired fears of American decline. Treasury Secretary James A. Baker III, a k a the Velvet Hammer, summoned the finance ministers of Japan, West Germany, Britain and France to the White and Gold Room of the Plaza Hotel in New York on Sept. 22, 1985, to devise an agreement to weaken the dollar.
We also got tough with our trading partners in 1971, when the Nixon administration imposed a 10 percent surcharge on imports to force them — Japan, above all — to revalue their currencies and help right an American trade balance that was sliding into deficit for the first time since the 19th century.
Tempting as it is, that approach to economic policy is unlikely to be very effective today. In the 1970s and ’80s, the club of industrial democracies was bound by the common Soviet threat. Japan, protected by the American nuclear umbrella, would do what the United States wanted. Today the Soviet Union is gone. China may not be as powerful as the United States, but it is powerful enough to hit back.
More important, trying to push China around like a bulked-up version of 1980s Japan does not fit with our national interests. In fact, it puts at risk a central, long-term American objective: drawing China into the club of prosperous, rule-bound and democratic nations.
As the economists Daron Acemoglu and James Robinson warn in their new book, “Why Nations Fail,” China’s autocratic government will end up suppressing prosperity, stifling innovation as it clings to power and breeding instability as factions fight for the spoils of growth. Helping steer China away from such an unstable, dangerous course is a core American goal.
China’s economy is slowing sharply. Political turmoil is swirling just weeks before only the second peaceful transition of power in the history of the Chinese Communist Party. Loud, unilateral American toughness at this stage is unlikely to help. It may prompt a reaction against the more outward-looking, reform-minded constituencies, strengthening conservative forces that are unwilling to cede any political control.
And for all this risk, getting tough is unlikely to deliver much.
The Chinese currency is the wrong target. Of course China has been manipulating its currency for years, buying mountains of dollars to keep the renminbi cheap and give its exporters a leg up. But Beijing appears ready to correct course.
Factoring in China’s fast inflation, which makes its exports more expensive, the real value of the renminbi has risen at least 15 percent against the dollar since mid-2010. Beijing has curbed its dollar hoarding. And its broad trade surplus is falling fast: down to 2.3 percent of its economic output this year from more than 10 percent in 2007.
