China: it's tariffs or nothing

In the news today, I see another instance of Tim Geithner pretending to get tough on Chinese currency manipulation:

In his testimony, Mr. Geithner is not expected to rule out declaring China a currency manipulator, a finding that could lead to retaliatory trade measures. The administration has so far refused to take such a step, relying instead on persuasion, though with little success.

What? Geithner "won't rule out" a step that "could lead to" retaliatory trade measures? Hu Jintao must be quaking in his boots!

I mean...come on...Tim Geithner?! This is the guy who, during his time in office, has met with the CEO of Goldman Sachs more often than the Speaker of the House or the Senate Majority Leader. The guy is a creature of the shadow banking system, which depends on cheap Chinese financing (a.k.a. Chinese currency manipulation) for its super-profitable shenanigans. He is not getting tough on China now, and he never will. Instead, what he will continue to do is what he has always done: make vague rumblings in China's direction, in the hope that it will placate the red-meat protectionist crowd back home into accepting the status quo for another few months. This kabuki theater is, of course, obvious to defenders of the currency status quo, such as The Economist's Ryan Avent:

As always, I'll reiterate: promises that revaluation will eliminate America's trade deficit and create hundreds of thousands of jobs are overselling what appreciation without structural reform can accomplish...But there's an election on, and populism is ascendent, and the trade warriors in Congress will have their day. I just hope the legislature holds to its recent pattern of behaviour—all talk and no action.

Whether Congress will continue to play "bad cop" and ultimately take no action, of course, remains to be seen:

“There is no question that the economic and trade policies of China represent clear roadblocks to our recovery,” Senator Christopher J. Dodd, Democrat of Connecticut and the chairman of the banking committee, said at a hearing with Mr. Geithner seated before him.

“I’ve listened to every administration, Democrats and Republicans, from Ronald Reagan to the current administration, say virtually the same thing,” Mr. Dodd, who is not seeking re-election, said. “And China does basically whatever it wants, while we grow weaker and they grow stronger.”

He added: “It’s clearly time for a change in strategy.”

The top Republican on the banking committee, Senator Richard C. Shelby of Alabama, was even harsher. “There is no question that China manipulates its currency in order to subsidize Chinese exports,” he said. “The only question is: Why is the administration protecting China by refusing to designate it as a currency manipulator?"

Big talk, but we've seen a lot of big talk, and not a lot of action, on this issue. Past experience tells us that this is more of the same-old same-old, but there's always hope that we'll be surprised.

Meanwhile, as Paul Krugman reminds us, China's currency policy continues to screw us over:

Regular readers may remember that I’ve spent more than a year trying to knock down the idea that the United States dare not get tough with China, because we need them to keep buying our bonds; as I wrote way back in May 2009, given the fact that we’re in a liquidity trap, a decision by China to buy fewer of our bonds would actually be doing us a favor — it would weaken the dollar, and help our exports.

I’ve failed, despite repeated attempts, to get through with this point here — but the Japanese get it. They’re complaining to China about its purchases of yen-denominated bonds, which they argue — correctly — hurts Japan by strengthening the yen.

It's not just the speed of our recovery that's being impeded; Chinese currency policy contributes to inequality here in America by making manufacturing workers less valuable and finance workers more valuable. It also arguably contributes to asset bubbles, in particular the housing bubble we just witnessed.

It has been clear to me for years that the issue of Chinese-generated global imbalances will only be resolved with U.S. tariffs on Chinese goods. That is not the optimal solution; the optimal solution is for China to change its policy voluntarily. But it will not. Not now, and not ever, unless tariffs force it to do so. For this issue to be resolved - and it must be resolved, or our economy and society will continue to be dysfunctional - it is tariffs or nothing.