On Wednesday night, a few hours before the representatives left Washington to get back to campaigning in their home states, the House passed a bill that would allow tariffs to be imposed on a foreign country for intentionally devaluing its currency to boost its exports. The target was clear: China. Numerous economists have complained that this tactic being used by China is hurting the exports of other nations, since its goods appear cheaper than they would if its currency was allowed to float. Will this new legislation lead to a tariff?
For starters, it's a little unclear if this bill is just a case of political posturing, or if Congress is serious. It was passed right before a big election, by a broad bipartisan margin. Meanwhile, the Senate has no intention of voting on it before the election, according to the Washington Post. So this could be one of those measures that the House passes to make a statement only for it to die in the Senate.
But even if the Senate does pass this legislation, it will not necessarily lead to a tariff for China -- it will merely make a tariff possible. The President would also have to sign the legislation, and the White House has not said where it stands. After all that happens an actual tariff would also have to be levied, which would be far more controversial.
The argument for a tariff is pretty simple. If China is purposely devaluing its currency, as some economists believe, then it is hurting U.S. exports since its goods will be cheaper for other countries to buy. So the U.S. could institute a tariff in retaliation.
But this would have a couple negative consequences. First, a tax on U.S. imports from China won't be particularly good news for American consumers. Through July, Americans have purchased around $194 billion in goods and services from China this year. U.S. consumers love Chinese products, but they will become more expensive with a tariff.
Second, is it really wise for the U.S. to take on China right now? The U.S. is in the midst of a painful economic slowdown, which has been fought in part through an unusually large amount of government borrowing. China is a very important buyer of U.S. debt. Imagine the following exchange:
U.S.: China we will impose a tariff on your goods because you are devaluing your currency and making our exports less attractive to other countries.
China: Because you are imposing a tariff, we will stop buying your debt.
U.S.: Just kidding. Forget about that whole tariff thing.
The Great Depression was exacerbated in part due to the "Smoot-Hawley Tariff Act," which was passed in 1930. Like a new tariff on China, it sought to make U.S. exports more competitive. It didn't work, because it merely ignited a trade war, with other nations retaliating through new tariffs on U.S. goods. It also made imports more expensive for Americans. Does Congress really want to take this failed strategy again?
The better response would be to attempt to continue to aggressively encourage the World Trade Organization to punish China. If the rest of the world stands together against the Asian superpower's currency devaluation, then it will have more trouble fighting back. But if the U.S. acts on its own, then retaliation by China will be much easier.
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