President Obama reportedly spent much of his meeting this week with Chinese Premier Wen Jiabao urging action to revalue the Chinese Yuan relative to the dollar. Simultaneously, Democrats in Congress are pushing a bill that would tack countervailing duties on Chinese imports in response to an alleged distortion of the exchange rate. Whether the Yuan is undervalued is a hard question. Given the many distortions in the Chinese economy, and despite assurances by protectionists to the contrary, we cannot really know, absent a free currency market, what the real exchange rate with China should be. What we can know is that if the Yuan is undervalued, as so many claim, U.S. consumers are getting a break on the price of the goods they buy that are made in China.
When the President says he wants to “fix” the Chinese currency situation, what he is really saying is that he wants Americans to pay more for Chinese goods. How much more? The math is pretty simple: Chinese goods account for 19 percent of U.S. imports, and imports account for 16 percent of American consumption, so if the Administration puts a tariff on Chinese imports of as much as 30 percent (as the Democratic House bill would allow), then these measures to “protect” us from China could add up to a new tax on Americans’ overall consumption of almost 1 percent. Just what we need in these hard times!