NCPA - National Center for Policy Analysis

Tariffs and Chinese Goods

September 17, 2003

With the collapse of world trade talks over the weekend, the protectionists in the Bush Administration are probably pointing their fingers at China and its allegedly undervalued exchange rate, says Bruce Bartlett.

It is often said that the Chinese yuan would rise by 40 percent if allowed to float freely, rather than being pegged to the dollar. Supposedly, this makes Chinese exports to the United States 40 percent cheaper in terms of dollars, and U.S. exports to China 40 percent more expensive in terms of yuan, says Bartlett.

However, it is just about impossible for a country to undervalue its currency against just one other currency:

  • The Chinese couldn't keep the yuan undervalued against the dollar without also keeping it undervalued against the yen, the euro and other currencies.
  • But if the yuan is undervalued against all currencies, then it should be running a trade surplus with every country, not just the United States; in fact, China runs an overall trade deficit and its surplus with us is more than offset by deficits with other countries.
  • Finally, if the yuan is truly undervalued against the dollar, then it is like giving every American a 40 percent discount card on everything made in China; our real incomes are higher in terms of what they will buy because of the Chinese policy.

Of course, there are those who will point to jobs in the United States that have been lost due to competition from Chinese imports. But is this really a sensible rationale for putting tariffs on Chinese goods, as Sen. Charles Schumer (D-NY) proposes? In all likelihood, companies now importing from China will just buy from the next cheapest producer, which may be Korea, Singapore, Mexico or someplace else, says Bartlett.

Source: Bruce Bartlett, "Tariffs and Chinese Goods," National Center for Policy Analysis, September 17, 2003.


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