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Monday, April 25, 2011

Taxing China's Assets

The subtitle to this article by Joseph Gagnon and Gary Hufbauer is "How to Increase U.S. Employment Without Launching a Trade War":

Taxing China's Assets, by Joseph Gagnon and Gary Hufbauer, Foreign Affairs: For much of the past decade, the United States has begged, pleaded, and threatened China to change its disruptive currency practices, which artificially make Chinese exports cheap and foreign goods sold in China expensive.
Today, in the midst of prolonged economic weakness, with the U.S. trade deficit rising and unemployment persistently high ... legislative pressure is again growing to raise trade barriers against Chinese goods. ... The United States clearly needs to ratchet up the pressure on China... But what action can the United States take to persuade China to stop its harmful behavior? ...
A more productive course would be to tax Chinese currency manipulation rather than Chinese exports. In order to undervalue the renminbi against the dollar, China drives the dollar's value up by buying dollar-denominated financial assets, principally U.S. Treasury bills and bonds. To discourage China from doing so, the U.S. government should tax the income on Chinese holdings of U.S. financial assets. ... Such a tax is allowed under international rules...
Taxing Chinese assets would certainly raise hackles in China, yet Chinese leaders would have no way to retaliate in kind... By taxing the precise actions that cause distorted exchange rates, the United States would increase the incentive for China and other currency manipulators to allow the values of their currencies to reflect market fundamentals. ...

    Posted by on Monday, April 25, 2011 at 02:25 PM in Economics, International Finance, Unemployment | Permalink  Comments (67)


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