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The China Currency Bill Will Make Americans Poorer, Not Richer

We seem determined to repeat the policy mistakes that made the 1930s Great Depression so deep. Already we have seen the massive increases in government spending and regulation.  Today's vote on the China currency bill by the Senate adds another mistake.  It resembles the infamous 1930 Smoot-Hawley tariff law.

True, China is manipulating its currency to lower the value of the Yuan relative to the U.S. dollar.  This manipulation makes it cheaper for Americans to buy their exports, be it toys, furniture, or manufactured goods.  It also makes it cheaper for us to purchase whole companies or shares in Chinese companies.  It also means that the Chinese have to pay “too” much for American bonds and American products. 

If passed, the Currency Exchange Rate Oversight Reform Act of 2011 would force China to raise the value of the Yuan.  And if they refuse to comply, we will increase the tariffs on what we buy from them, equivalent to putting a special tax on the goods we buy.

China’s currency manipulation is a mistake.  Yet, their mistake doesn’t mean we should make one also.  If Chinese leaders are stupid enough to subsidize Americans by selling their goods and assets too cheaply, why should we stop them?  

Nevertheless, we do have genuine quarrels with China, but they are of a totally different nature: their massive theft of intellectual property rights.  In some industries, their high growth is based on the sheer stealing of this knowledge.  If we want to get mad at the Chinese, it is for them engaging in this theft, not for selling us goods and assets cheaply.

Countries subsidize industries all the time and it normally is not a big deal.  For instance, our own government subsidizes farmers and doles out massive subsidies to so-called green energy, this is of course highly inefficient as what these producers gain is less than what it costs  taxpayers to subsidize them.  With the "green" subsidies, products are manufactured where the costs far exceed the benefits.  General Motors will not even come close to recouping the original $50 billion given by the Obama administration, let alone the $45 billion in tax write-offs or the “Cash for Clunkers” program and other subsidies.  Likewise, the half billion dollars spent on Solyndra was a total waste.

China’s manipulation of its currency is somewhat similar in that it is wasteful, though not quite as wasteful as they are made across the board rather than targeting of individual industries.  If companies can only export to the United States and other countries because of subsidies, the costs of producing those goods are obviously greater than the benefits.  

U.S. unemployment is extremely high, with unemployment setting a post-World War II record -- being above 9 percent for 26 of the past 28 months.  Politicians naturally feel pressure to do something to lower it.  But increasing the value of the Yuan or higher tariffs will make things worse -- temporarily increasing our unemployment rate.  

Some companies and workers will win from the higher Yuan, but others will lose.  Many sectors are highly integrated and American products rely on components manufactured or assembled in China.  Apple is such a company.  If tariffs are imposed, the price of Apple iPads and iPhones will rise. 

Even if China decides not to retaliate with imposing its own tariffs on American products, Americans will lose -- paying higher prices and facing some increase in unemployment.  The prices that Chinese pay for our bonds and products will fall, too.

The real mistake of those supporting this proposed law directed at China is the false notion that there is a fixed number of jobs.  Supposedly either the China or the US gets those jobs.  Bit this is totally wrong.  If Chinese start making certain products because of these subsidies, Americans will soon make others.

Fortunately, unless the law ignites a general trade war across the globe, the damage from the proposed law is limited. Despite popular beliefs, Chinese trade actually  involves only a small part of our economy, equaling about 3 percent of our GDP.  Higher tariffs will reduce but not eliminate even that small fraction. In other words, the proposed law is a limited version of Smoot-Hawley.

Too often, politicians in their desire to help, make the economy worse.  Few politicians are willing to publicly oppose this bill.  In the Senate, only 3 Democrats and 16 Republicans voted against the preliminary motion on the bill on Monday.  Republican House Speaker John Boehner warns that the legislation is “pretty dangerous,” but he faces an uphill battle with more than 200 members of the House already signing on as co-sponsors.

A lot of Americans hate China and the new law seems an easy way to get back at them as well as create jobs in the United States.  But the proposed law will only make Americans poorer.

John R. Lott, Jr. is a Fox News.com contributor and the author of the revised third edition of "More Guns, Less Crime (University of Chicago Press, 2010)."

John R. Lott, Jr. is a columnist for FoxNews.com. He is an economist and was formerly chief economist at the United States Sentencing Commission. Lott is also a leading expert on guns and op-eds on that issue are done in conjunction with the Crime Prevention Research Center. He is the author of eight books including "More Guns, Less Crime." His latest book is "Dumbing Down the Courts: How Politics Keeps the Smartest Judges Off the Bench" Bascom Hill Publishing Group (September 17, 2013). Follow him on Twitter@johnrlottjr.