Debate Club

For a Serious Impact, Tax Chinese Assets in the United States

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Any exchange rate involves two currencies by definition. Congress, and the U.S. government more broadly, undeniably have an interest in any foreign attempt to manipulate the value of the dollar in terms of another currency. So, what action should the U.S. government take in response to China's currency policy?

First, it is important to understand what China is doing. The currencies of countries that are growing rapidly tend to increase in value, which offsets their declining costs of production and maintains balanced trade. By aggressively buying U.S. and European assets, China short-circuits this currency appreciation in order to boost Chinese exports and damp Chinese imports. This is a strategy that has been copied by many other developing economies, and the International Monetary Fund estimates that governments in these economies are spending about $1.2 trillion this year to hold their currencies down, about half of which is accounted for by China. This spending has distorted trade balances between developing economies and advanced economies by a roughly equal amount, so that U.S. net exports are at least $400 billion lower than they would otherwise be. That translates into 3 million or more lost jobs in the United States.

[Read more bout the deficit and national debt.]

Before the Great Recession, the U.S. Federal Reserve responded to this currency manipulation by holding interest rates low to relieve pressure on the dollar and to encourage job creation in the United States. Much of the job creation came in the form of building houses. Now that the housing bubble has collapsed, the Fed has pushed interest rates to zero and yet the recovery remains woefully weak. We need China to stop its harmful manipulation immediately.

The best course of action would be to tax the assets that China and other currency manipulators buy in the United States, as I proposed recently with my colleague Gary Hufbauer. This has the advantage of being consistent with international law and it gets directly at the cause of the problem. The current legislation being considered by Congress imposes minor rule changes for antidumping and countervailing duty cases, changes to U.S. government procurement practices, and consultations with international institutions. These will not have a serious impact on China or other currency manipulators and some of these measures may be ruled illegal under international law.

Joseph Gagnon

About Joseph Gagnon Senior Fellow at Peterson Institute for International Economics

Tags
China
Asia
Congress
legislation
economy
money

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