A few weeks ago, Barack Obama's campaign was attacking Hillary Clinton for her ties to Indian outsourcing companies. This week, the two senators closed ranks together on another hot spot of globalization anxiety: China.
The Financial Times reported Thursday that Obama and Clinton have announced that they will co-sponsor legislation aimed at forcing China to revalue its currency upward. If China does not comply, the legislation will require that the U.S. levy anti-dumping duties against the country.
As Obama explained in a letter to Treasury Secretary Henry Paulson on June 16, China's currency "manipulation" has artificially lowered the prices of Chinese products and thus contributed to the huge U.S. trade deficit. Various forms of a bill meant to address this problem have been floated in the Senate over the last couple of years, but never put to a vote. The significance of the announcement by the two leading Democratic candidates for president is that, as the Financial Times reports, it raises the possibility of a veto-proof majority. And it proves that, in the current political climate, few stances are as safe as being tough on China.
The early pledge to vote for the bill will strengthen the candidates' claims to be defending U.S. manufacturers against what they argue is unfair competition.
A critical stance on U.S. trade policy has become increasingly de rigueur for candidates as the Democratic presidential field tilts towards a populist stance on economic issues.
Economists are mixed on the question of whether a sharp revaluation of the Chinese yuan would have a significant effect on the trade deficit, but there is general agreement that China should allow a speedier rise than is currently taking place, if only for its own long-term economic health. Some of China's leaders have publicly recognized this, but the pace of upward revaluation so far has been glacial.
But the pros and cons of currency revaluation in China are a separate question from what, practically speaking, the U.S. can do to make China kowtow to Washington. As senators running for president, Obama and Clinton can say anything they want about China and vote for any bill they please without suffering any pain. Should Obama or Clinton actually be elected president they will find their circumstances much different. Hillary Clinton probably recalls the example set by her husband, who campaigned for president promising to revoke China's "most favored nation" trade status (although back then the pressing issue was human rights, not currency manipulation) -- but completely changed his tune once in office.
There are at least two major reasons why the executive branch keeps failing to slap China's hands with anything more than a wet paper towel. The first is that any significant action that makes Chinese exports more expensive would undoubtedly cause pain for all the American corporations that have set up manufacturing operations in China. In this respect the huge trade deficit is slightly misleading. Apple's iPods and iPhones are assembled in China, but most of the profit Apple makes on selling those snazzy devices stays right at home in the U.S. If China's currency rose sharply, Apple's costs would go up and its profits down.
The second issue is closely related to the first. The Chinese and U.S. economies are so tightly interwoven that China likely has the power to strike back at the U.S. should it feel that the U.S. is taking unfair punitive action against it. What happens if in response to anti-dumping duties levied by the U.S., China stops purchasing U.S. Treasuries, or decides to reinvest the dollars it already owns in euros? Who will step to the plate to bankroll the U.S. government's spending spree? What happens if a trade war breaks out between two of the world's biggest economies?
This is not to say that the U.S. shouldn't be pressuring China to speed up the pace of its currency revaluation. It's only to point out that at the moment, Obama and Clinton can be as hawkish as they want to be without paying any price. It won't be so easy if one of them manages to actually move in to the White House.