The basic math behind Republican presidential candidate and former Massachusetts Gov. Mitt Romney’s tax and jobs plans isn’t the only thing that doesn’t add up. Neither does his posture on China, which he doubled down on in last night’s final presidential debate.
Gov. Romney pledged again last night that “on day one I will label them a currency manipulator.” But everything about him says he’s all bark and no bite on the real policy actions needed to redress the critical damage wrought by China’s exchange rate on American workers and exporters. Here’s why.
For starters, the former Massachusetts governor surrounds himself with people opposed to getting tough on China. His new economic policy director lobbied for Wall Street against a law to get tough on China’s exchange rate. His choice for vice president, Rep. Paul Ryan (R-WI), voted in 2010 against a law to crack down on Chinese currency manipulation.
Another reason to doubt Gov. Romney’s convictions: China’s undervalued exchange rate inflates profits for his corporate executive and hedge fund colleagues by boosting job-displacing exports to the United States. These are the people supporting his campaign and the people whom Gov. Romney erroneously believes are the key to America’s economic strength.
By selling the renminbi to buy dollars, China bids its currency down and the U.S. currency up, sapping jobs and manufacturing from the U.S. economy. Despite rising considerably since 2005, most estimates find China’s exchange rate is still roughly 30 percent undervalued. The resulting trade imbalances destabilize both the U.S. and Chinese economies. U.S. policy needs to prioritize raising China’s exchange rate but Gov. Romney is not going to do this.
Consider the economics. China’s undervalued exchange rate in essence provides an across-the-board subsidy to goods produced there and sold in the U.S. market.
But that’s not all an undervalued exchange rate does. It also undervalues Chinese assets and labor costs in the eyes of foreign investors. Thanks to China’s exchange rate policy, the factories in China and the workers that power them are perpetually on sale for U.S. corporations that want to relocate production there and capitalize on global supply chains based out of China.
It doesn’t take a shrewd businessman like Mitt Romney to see that buying factories and workers on the cheap in China and selling what they manufacture for overvalued U.S. dollars means big profits for those willing and able to take advantage of this situation. Getting tough on China’s exchange rate would cross interests with many large U.S. business interests who are profiting from this deal—including one man The Washington Post named a “pioneer” of such dealings: Mitt Romney.
The flipside of this arrangement is that goods produced in the United States by American workers are commensurately overvalued and less competitive in China and elsewhere in global markets where China competes with U.S.-based export businesses. And China’s exchange rate policy is not the only thing that has enticed American businesspeople like Mitt Romney to move their business operations to China at the expense of people in the United States. Loopholes in the U.S. corporate tax system provide incentives for companies to relocate production overseas, where they can hold their profits indefinitely to avoid paying taxes they owe.
Gov. Romney’s tax plan would exacerbate this incentive for offshoring and reward such behavior with a tax amnesty.
China is also investing heavily in educating the productive workforce of the future and building the advanced infrastructure that allows people, goods, and ideas to move around more efficiently in the economy. Technology parks connected to transportation hubs are popping up all over China, providing foreign and domestic businesses an efficient platform from which to compete. Gov. Romney’s fiscal plans, reflected in the Ryan-Republican budget he embraces, would actually disinvest in these and other growth-enhancing public goods in the United States just when China is ramping up its own investments.
This can only make sense from Gov. Romney’s perspective: Why should a 1 percenter pay U.S. taxes to invest in such public goods in America when they can use China’s for free?
On China’s side of the exchange rate arrangement, the policy has undoubtedly helped fuel economic growth, create jobs, and raise the standard of living for millions of people. Still, rapidly rising inequality shows how most of the benefits from this policy are accruing to Chinese authorities and their business cronies—China’s 1 percent. These are the people with whom Gov. Romney and his business supporters shake hands when they seal a deal to move jobs overseas.
China’s 1 percenters are also the gatekeepers to the sweet deal that footloose multinational businesses have going with China’s exchange rate. Anything more than tough talk on China’s “currency manipulation” is a surefire way to end this profitable game for the “job creators” Gov. Romney holds so dear.
Bottom line: There’s no reason to believe that Gov. Romney’s talk on China is anything more than campaign bluster calculated to score political points. If the Republican presidential candidate truly believed in getting tough on China, he would have put his money where his mouth is long ago.
Adam Hersh is an Economist with the Center for American Progress Action Fund.