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Currency wars: China should impose green taxes on its exports

Gérard Roland, E. Morris Cox professor of economics and professor of political science | October 6, 2010

American and European policy-makers have been clamoring about going on a currency war to force China to appreciate its currency. Even Paul Krugman, whose economic insights have been so precious in the Great Recession, in the light of the sad ignorance of politicians and a large part of the media, is loudly supporting the Levin bill giving the Obama administration more power to impose tariffs on Chinese imports. A lesson from the Great Depression was that moves to impose tariffs on one’s competitors spiral into a global trade war that brings international trade into a nosedive and leads to even more global economic misery.

Let us, for once, look at the issue calmly from the Chinese side. Exchange rate policy is in the end not decided by the Chinese Central Bank but by the Politburo. The more they feel bullied into appreciating their currency, the more they will resist such calls. Their decision has nothing to do with the exact extent of underappreciation of the Chinese currency and all to do with showing that China will not let itself be humiliated again by the West as during the opium wars and the period of territorial concessions. Tim Geithner who understands China very well knows this but the Obama administration is yielding to pressure from Democratic representatives in Congress who myopically clamor for protectionist measures against Chinese imports and have no clue about the international situation. China will not let itself be bullied to yield to the national interests of the US or any other country. Doing so would immediately undermine the position of the current leaders.

The sad thing is that this tension has pushed China into a corner. It would be in the interest of the Chinese economy to let its currency appreciate. Chinese manufacturing firms are in such a strong competitive position that the negative effect on Chinese export revenue would not be as large as sometimes feared. Chinese manufacturing firms are not only good at cutting costs, they are producing increasingly sophisticated products, climbing up the value added chain and have developed particular skills at assembling complex goods. A stronger Renminbi would make Chinese energy imports cheaper, as well as consumer goods from abroad which would benefit hundreds of millions of Chinese consumers. Chinese currency reserves are so large that they could finance enough imports to buy the needed social peace with those who were left behind by the reforms. Unfortunately this is not going to happen because such a move would be interpreted as “yielding to the West” and thus politically unpalatable, and even suicidal, to the Chinese leaders.

There is a creative solution that would show genuine international leadership on the part of Chinese leaders: start imposing a green tax on Chinese exports. This would have the same effect as an import tariff imposed on the US side but the revenue would go to the Chinese government. If they use the tariff revenues solely for green investments to reduce Chinese carbon emissions, they would achieve two goals at the same time: 1) reduce the international currency tensions that risk leading to dangerous trade wars while saving face, 2) show international leadership in adjustment to climate change. China has after all become a main manufacturing hub in today’s world economy and it seems only normal that all countries that benefit from Chinese goods pay their part in reducing carbon emissions related to that manufacturing process. If Chinese leaders were bold and creative enough to make such a move, it would certainly not be enough to shame US politicians into doing something about climate change but it would further isolate the – too large – lunatic fringe in this country that claims that climate change is a hoax. It would certainly do a lot to show that Chinese leaders are able to think beyond the sole interests of their country and exercise some international leadership in one of the most important issues of the twenty first century.

Gerard Roland

Professor of Economics and Political Science
Chair of the Economics Department

Comments to “Currency wars: China should impose green taxes on its exports

  1. China is experiencing massive inflation at the moment. The problem is that China’s domestic economy is slowly creeping up on it’s export economy. Some manufacturers that were once strictly international suppliers are now running at domestic/international parity. If China lets it’s currency appreciate, it will cripple The US. Cripple the US to ridiculous levels.

  2. It does not have to be so troublesome. Just tie your own hands and not buy from China. China did not invite you to import. Wake up!

  3. Thats a sham, China keeps it currency low so other goods can’t compete,with their huge population of willing slave labor who could even come close?Vietnam,not even Mexico.Currency wars are brewing,who gave those cheaters most favored nation status?Slick willie? Gat&Nafta must be renegotiated trade tariffs must be put on the basics of our economy,which are easy targets for China with the lobby power they wheeled.Trade wars now to save our children from the mid therties.

    Thats a sham, the Big play is currency value China keeps its currency low

  4. One important lesson from all the mess is that it is time to fix the dollar standard, so that the Federal Reserve would no longer determine “at its will” how much other countries’ hard-earned savings should be worth. That is the most important solution to the worldwide imbalances.

  5. ha, it seems like China is a rambunctious rebellious kid trying to get out of the shadows of its parents. Great point about the self-imposed tariff that China could do;but isn’t China already making much headwaves as a developing country which has already adopted widespread green technology?

    A question about the currency war. If it does happen, wont it help consumers overall? except for people laden with huge debts? Since goods will be cheaper and there will be more disposal income than the inflationary years- provided that our income does not adjust to the changes accordingly.

    Furthermore, since most countries adjust their rates according to US rate,what will be the consequences? Afterall everyone would just follow the lead of US hence the “graph” would have shifted downwards instead of any change in the “formula”.

  6. The issue of the value of the Renminbi has been talked about for years and up until now, there has not been an effective way to get China to allow its currency to appreciate. Ignoring the matter has been tried and that does not work. Jaw-boning has been tried and that has not worked. Now, Congress is threatening to impose tariffs. Gerard Roland’s argument and his lesson from the past that this will backfire has a loud and strong ring of truth.

    Thanks professor, for the creative green path forward that you have suggested: a green tax by the Chinese on their exports. This is the first path to daylight I’ve seen. A way forward that recognizes the paramount Chinese concern about losing face.

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