New York Times
June 8, 2005

Will It Take a Tariff to Free the Yuan?
U.S. Senators Charles E. Schumer and Lindsey O. Graham

DISMAYED by China's failure to play fair on free trade, we have offered legislation to impose a tariff on Chinese exports to the United States if Beijing continues to keep the value of its currency, the yuan, artificially low compared with the dollar. While our efforts to pressure China to change have been called protectionist, nothing could be further from the truth. Pushing China to reform is the free trade position. Those who favor the status quo are the real protectionists; they are protecting China.

China seems to want to obtain the benefits of free trade but not bear any of its responsibilities. Remember, a major tenet of free trade is that currencies need to be free to float in value against other currencies. When that happens, the free market self-corrects in the face of trade imbalances.

For example, the currency of the country with a trade deficit falls in value, causing imports to shrink (because they become more expensive) and its exports to rise (because they become cheaper). Eventually, this reduces the trade deficit. But if a currency is artificially fixed, the cost of exports and imports is distorted.

Since China artificially keeps the value of its currency low, American companies are placed at a competitive disadvantage with their Chinese counterparts. Furthermore, pegging a major trading country's currency to another country's, as China does with the dollar, throws the world's trading system out of balance. That is why the European Union and Japan also favor a revaluation of the yuan.

If China were simply a developing country that needed time to adjust to free trade, we could be more patient. But China is already a trading giant -- one whose political leadership, against the advice of its own Finance Ministry, seems more interested in accumulating wealth and maximizing exports than in competing fairly.

Indeed, China's mercantilist approach explains why currency is not the only area where Beijing fails to play by the rules. Beijing acquiesces in Chinese companies' appropriation of our intellectual property and routinely keeps American companies from selling products in China, in defiance of the World Trade Organization. But China's manipulation of currency is the most pressing complaint because it is at the nub of the world trading system.

China's manipulation has another unhappy effect: it undermines support for free trade. Globalization isn't easy. Jobs are phased out even as other jobs are created. When a major trading country like China can resist the rules in areas where America might gain jobs, it discourages our people from fully embracing free trade and causes them to fixate on the jobs that are lost.

To us, the only real debate about currency is how to get China to play fair. At the administration's request, we withheld bringing our legislation to the floor for two years while our government tried the art of quiet diplomacy. But given the attitude of the Chinese leadership, it should come as no surprise that gentle persuasion has not worked.

When our legislation finally came before the Senate in April as an amendment, it won bipartisan support. We agreed to withdraw the amendment with assurance that we would be guaranteed a vote by August.
Since then, we have begun to see the first real signs of progress. The administration appears to be taking a tougher line on China, saying that Beijing's currency policies are ''highly distortionary,'' and the Chinese have begun to reconsider their currency manipulation.

However, the time has come for actions, not more words. That is why the Senate should pass our bill this summer, sending a signal to China. Our ultimate goal is not to impose a tariff on all Chinese exports, but to prod the Chinese to take the concrete steps to allow the yuan to float freely. Under our proposal, the Chinese would not have to float their currency immediately, but they should take immediate and concrete steps toward that goal.

We realize that our proposal is seen by many as strong medicine. But given that Chinese policies are unfair to American businesses and workers -- and that they jeopardize the increasingly important but fragile regime of global free trade -- we believe our strategy is the best way to insure that China finally plays by the rules.