As the Ds and Rs duked it out this year on health care, macroeconomic stimulus, and financial reform we all heaved a collective sign and muttered – why can’t they just work together? Wouldn’t we get better policy if they compromised and attacked our problems rationally?
This question reminds me of the guy with the broken leg who prayed that both his legs would be equally strong – only to find that now both his legs are broken! He wished for something and he didn’t get exactly what he had hoped.But he did get what he wished for.
The headline yesterday was that the Ds and Rs came together in the US (Nut) House and decided to pass legislation allowing US companies to bring unfair trade allegations stemming from China’s exchange rate policy. If this is an example of getting what we wished for – I plan to stop wishing altogether. There is absolutely nothing in this legislation that makes any sense – except that the two parties have decided to outbid each other on the populism score. Is this what we should expect next year when these former antagonists get together on tax and spending? With a presidential election coming up in two years – will they climb over each other to give us tax breaks and new entitlements? If so, I long for the days of mean and vindictive shouting matches. Luckily the Senate will not take up this nonsense until after November and we are saved from Two-Party Senatorial Yuan-idity for a while.
To keep this short I won’t review all the reasons I have already written about in my postings to explain why I think that this kind of policy won’t work. Luckily the business press is full of good analysis explaining why it is not a good idea. But I would like to focus on two points here.
First – companies will be able to apply for countervailing duties against Chinese goods that have injured them by estimating the unfair undervaluation of the offending country’s currencies. Now we might all agree that I am overweight – but not by exactly how much. My mother always said I was gorgeous – so she might have a small estimate. My football coach said I looked like a pregnant elephant and ran like a giant tortoise in mud. He might argue I needed to lose a lot of pounds. Exchange values are no different. There is no perfectly acceptable and objective measure of currency undervaluation. It is bad enough that economists scientifically disagree -- I can’t wait to see all the clever and innovative ways companies and government will use to estimate currency undervaluation. This will be more entertaining than Lady Gaga and Larry King doing the fox trot.
Second, if you are keeping up with global events you will notice that numerous countries whose growth rates are closely tied to their export performances, are increasingly introducing policies to depreciate their home currencies. While China is a standout in this regard – Japan has recently joined the fray with vigorous yen-selling. If Japan is going to depreciate, then do you really think that other Asian countries are going to just sit around and let their currencies appreciate? With a slow growth global economic environment competition for export sales is keener than ever.
The upshot is that while the US House is pointing its boney finger at China – there are probably 10-20 countries whose apparent survival hinges on a beggar-thy-neighbor exchange rate policy. How can the members of the House think that they can single-out China and ignore the scores of other countries that are unfairly protecting their domestic exporters? Brazil has already complained of diminished competitiveness due to such actions by other countries. If it keeps up, Brazil will join the growing team of depreciators. Are we really ready to apply this protectionist totally unenforceable and possibly illegal mumbo jumbo against scores of countries?
Now imagine this – after this legislation is passed – virtually any US export company registering their complaints against China, Korea, Vietnam, Brazil etc for their exchange rate policies. And in a slow growth economy – how difficult will it be for these companies to show with great statistical acumen how their exports were injured? We will have so many companies filling out applications that they won’t actually have time to produce and export! The US House dream will have come true – they want to make our export success equal to those of our competitors – and we will end up all having lower exports! Viola