Targeting the yuan: a feel-good but futile response

Change the focus

The PRC’s trade behaviour makes it a tempting target. The June announcement of an end to the dollar peg was fraudulent, and the exchange rate is only one part of China’s non-cooperative policy. Beijing is now taking important action to liberalise its balance-of-payments regime, which is necessary before the dollar peg can genuinely be broken, but the process has begun late and will be slow.

Nonetheless, congressional action targeting the peg will not work. The level of CVD, for example, cannot be set properly. The exchange rate is not a major factor in the trade deficit. A successful effort to push production out of the PRC would only move it to other low-cost sites. And it is not at all clear that a smaller trade deficit would translate to more and better American jobs. More fruitful policy steps are:

• cutting the federal budget deficit by cutting spending, thereby giving a boost to net US saving and putting a real dent in the trade deficit;
• making Chinese balance-of-payments liberalisation the primary American goal in bilateral economic relations, for example in the Strategic and Economic Dialogue; and
• rather than taking stabs at the extent of exchange rate undervaluation, the Departments of Treasury and Commerce should estimate the extent of subsidies for state-owned enterprises, another tough task but a much bigger harm to American firms.

Feel-good policy

Legislation targeting the yuan may feel good, but it will not accomplish anything.