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The right route on trade

Republicans and Democrats in Congress finally found something they could agree on: trade pacts with Panama, Colombia and South Korea that could help America's economy.

October 17, 2011
  • South Korean President Lee Myung-bak, second from right, dines with President Obama at a Korean restaurant in Washington. Congress passed a free-trade agreement with South Korea.
South Korean President Lee Myung-bak, second from right, dines with President… (European Pressphoto Agency )

After years of partisan wrangling that has blocked Congress from taking major steps to boost the flagging economy, Republicans and Democrats finally found something they could agree on last week when they approved long-stalled free-trade agreements with Panama, South Korea and Colombia. It's a big victory for the Obama administration, the U.S. economy (which is expected to benefit from the pacts to the tune of $12 billion a year added to the gross domestic product) and for Congress itself, whose reputation as a do-nothing pack of squabblers has caused its approval ratings to plummet.

But for all the good news on trade, there's a troubling cloud on the horizon: a bill approved in the Senate last week aimed at punishing China for undervaluing its currency. Like the trade pacts, the bill has attracted bipartisan support, yet it's bad for many of the same the reasons the pacts are good.

Throwing up barriers to trade is not a cure for a weak economy; in fact, it tends to make things worse. That's certainly what happened after Congress approved the protectionist Smoot-Hawley Tariff Act in 1930 in a misguided effort to create American jobs. The increased tariffs prompted our trading partners to retaliate against American goods, launching a trade war that worsened the effects of the Depression. The Senate bill directs the U.S. Treasury to raise tariffs against countries with "misaligned currencies" — meaning it's aimed squarely at China.

There is little doubt that the Chinese yuan, whose worth against the dollar is allowed to float only within a narrow range set by Beijing, is undervalued. This hurts U.S. manufacturers and deepens the trade deficit. Attempts at pressuring Beijing to raise the value of the yuan have had some success — since 2005, its value relative to the dollar has jumped about 30% — but not enough. There is some justification for thinking that Washington should turn the screws harder, and if China responded to the Senate bill by hiking the yuan's value, it would boost U.S. economic growth. But Beijing takes a very dim view of such strong-arm tactics. The more likely outcome, should the bill be approved by the House and signed by President Obama, would be an endless series of disputes at the World Trade Organization, retaliatory tariffs on U.S. exports and higher prices in the U.S. for Chinese goods. That wouldn't grow American jobs, and could very well result in job losses.

We don't often agree with House Majority Leader John A. Boehner (R-Ohio), but his refusal to bring the China currency bill to a vote in the House is courageous and correct. There are better ways of reducing the trade deficit with China, such as aggressively pursuing cases against Beijing at the WTO and demanding that China do more to protect intellectual property rights.

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