Currency wars: China should impose green taxes on its exports

Gérard Roland 09 October 2010

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US and European policymakers have been clamouring about starting a currency war against China to force it to appreciate its currency. Even Paul Krugman, whose economic insights have been so precious in the Great Recession, 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 under-appreciation 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 cry out for protectionist measures against Chinese imports and have no clue about the international situation. China will not let itself be bullied to submission by 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, by 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 instead 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 all-too-large-lunatic fringe in the US 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.

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Topics:  Global economy International trade

Tags:  US, global imbalances, China, exchange-rate policy

E. Morris Cox Professor of Economics and Professor of Political Science, University of California, Berkeley; NBER and CEPR Research Fellow

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