Thursday, June 30, 2005

Kudlow on Trade with China

Larry Kudlow on China Trade, the Yuan, and Smoot Schumer and Hawley Graham: "If a store is selling quality products at low prices, why would anyone want to shut it down? This rhetorical question was asked by economist Arthur Laffer last week in connection to an unprecedented attack on China trade by numerous U.S. senators. In response to the China bashing, the stock market plunged.

How fitting that such a misguided approach to both the economy and national security would come on the 75th anniversary of the infamous Smoot-Hawley tariff bill. According to economist Thomas Sowell, that massive tariff helped trigger the Great Depression, with U.S. unemployment rising from 9 percent in 1930 to 16 percent in 1931 and 25 percent in 1932.

Today, senators Smoot Schumer and Hawley Graham have proposed a 27.5 percent tariff on Chinese imports unless China raises significantly the value of its yuan currency. The senators seem to be angry at a rising bilateral trade deficit resulting from Chinese imports to the U.S. But so what? Free trade only empowers our consumers. In the last couple of years the U.S. has created about 3.5 million new jobs, the unemployment rate is only 5.1 percent, and the nation's GDP is expanding at a 4.5 percent pace. Meanwhile, China's economy continues to climb near a 10 percent rate, with the heretofore impoverished Chinese population slowly but surely entering the modern realm of rising global prosperity.

Schumer and Graham believe that a higher yuan would narrow the trade deficit. But Alan Greenspan completely disagrees. The Fed chairman told a Senate panel that 'some observers mistakenly believe that a marked increase in the exchange value of the Chinese renminbi [yuan] relative to the U.S. dollar would significantly increase manufacturing activity and jobs in the United States. I am aware of no credible evidence that supports such a conclusion.'

More, Art Laffer argues that a stable yuan linked to the dollar has promoted strong economic growth at low inflation for the U.S., China, and the rest of the world. 'We have outsourced Alan Greenspan to China,' said Laffer, 'and that's a good thing for everyone.'

...The freedom to trade and the freedom to choose are central to the economic freedom that's necessary for nations to grow and prosper. Centuries of economic history confirm this, and yet some people seem to want to repeat the worst mistakes of the past. Open trade and currency stability enormously benefit both the U.S. and China and may well lead to improved international relations. Why do senators Smoot Schumer and Hawley Graham want to disrupt the 21st century march to peace and prosperity?

Cutting off your nose to spite your face makes no sense for individuals, nor for nations. Hasn't history taught us that free trade is part of the solution - not the problem?"
I caught part of this debate yesterday when Senator Schumer appeared on Kudlow & Company on CNBC yesterday. Sen. Schumer certainly held his own and argued that the purpose of the bill was not to actually impose tariffs to but to pressure the administration and China to engage in productive efforts to recognize the situation with the yuan and its effect on certain domestic US manufacturing firms. Given that if the bill is indeed a threat not a implemented policy - then it does not concern me as much as it did before I saw the interview. By the way, while Larry Kudlow's show comes on at an awkard time for me (5pm Eastern), I think it is the best of the general business shows (without Jim Cramer whose stock show follows)including those of Neil Cavuto on Fox and Lou Dobbs on CNN. Of course, CNBC during the day is often mandatory depending on the situation as it indeed is all business all day with up to speed information.

No comments: