Paul Krugman has another piece on China's currency policies. One thing he does in this latest piece is reject "two reasons [that have been offered] for not confronting China over its policies." One of these he describes as follows:
Second, there’s the claim that protectionism is always a bad thing, in any circumstances. If that’s what you believe, however, you learned Econ 101 from the wrong people — because when unemployment is high and the government can’t restore full employment, the usual rules don’t apply.
Let me quote from a classic paper by the late Paul Samuelson, who more or less created modern economics: “With employment less than full ... all the debunked mercantilistic arguments” — that is, claims that nations who subsidize their exports effectively steal jobs from other countries — “turn out to be valid.” He then went on to argue that persistently misaligned exchange rates create “genuine problems for free-trade apologetics.” The best answer to these problems is getting exchange rates back to where they ought to be. But that’s exactly what China is refusing to let happen.
His assumption seems to be that "confronting" China on this issue necessarily involves "protectionism." He accepts that it does, but says that confrontation is justified anyway, in order to "get[] exchange rates back to where they ought to be."
What I wonder is, why does he think that action taken against China in this regard has to be protectionist? Is he assuming that the only possible response is to slap high tariffs on various Chinese products? If so, I'm not sure that's true. If you're going to take some action against China's currency policies (and it's debatable whether this should be done), why not start with a WTO complaint? A number of people think this has a decent chance of success (although many others believe it does not). A WTO complaint has some key benefits over tariffs. First, it wouldn't be a unilateral, protectionist measure, as it would make use of multilateral procedures before imposing any trade sanctions. Second, it would be clearly tied to the goal of changing China's currency practices. By contrast, the various recent tariff duties imposed on China (which some have said are really about currency values) have protectionist purposes as well, and thus their link to currency values is less clear. To me, such tariff duties seem more confrontational. And third, you don't have to spend time and resources defending the tariffs at the WTO (as is happening with the safeguard tariffs on tires).
Of course, it may be that a WTO complaint would fail. Even if it has some chance of success, as many argue, I don't think there is a high probability of winning such a claim. But it's also possible that simply filing the complaint could have an impact. And if it ultimately does fail, and you still really want to do something, you can then go back to the tariffs.
