The recent health-care bill that President Obama signed may have its similarities to the proposals President Nixon unsuccessfully presented to Congress in the early Seventies, but those are far from the only pages from the 37th Chief Executive’s playbook that are being re-examined now. In recent weeks, 130 members of Congress sent a letter to Treasury Secretary Timothy Geithner urging that a surcharge – in other words, a tariff – be placed on Chinese imports. They are supported by liberal economist (and New York Times columnist) Paul Krugman. The Representatives and Krugman point to Nixon’s 10 percent surcharge imposed on imports in 1971 as a precedent.
The venerable British journal The Economist has a new article assessing the reasons for the Nixon surcharge (which was to a great degree the brainchild of then-Treasury Secretary John Connally) and showing why its purpose, and the effects it had on the world economy at the time, do not necessary show that a tariff on Chinese goods would benefit the American economy now:
China’s foreign-exchange reserves now total $2.4 trillion, of which about 70% are thought to be in dollars. In 1971 the central banks of America’s trading partners had amassed a rather smaller hoard, of about $40 billion. But that was enough to buy the gold in Fort Knox three times over, if America upheld its commitment to sell the metal at $35 an ounce. Britain’s request to exchange dollars for gold on August 13th 1971 was the last straw. “Although the US government attached no great importance to the gold as such, a run on this gold would have been a sorry spectacle,” wrote George Shultz and Kenneth Dam, two prominent economic officials in the Nixon administration, in their book “Economic Policy Beyond the Headlines”. On August 15th Nixon, in effect, announced that America was now unwilling to do what it would soon be incapable of doing—converting dollars into gold at the agreed exchange rate.
Messrs Shultz and Dam argue that the import surcharge was intended as “an attention-getter and a bargaining chip”. It allowed John Connally, Nixon’s treasury secretary and a Texan, to stride down the corridors of international finance “with both guns blazing”. In the face of this bravado America’s trading partners duly backed down. By December they agreed to let the dollar fall (by a trade-weighted average of 6.5%) and the surcharge was removed. Nixon was able to present the humbling of the dollar as a political victory. But were Barack Obama to emulate him, would he really enjoy the same result?
The obvious difference is that in 1971 America was locked into a system of fixed parities. By pegging to the dollar, a currency was automatically fixed to everything else. Since July 2008 China has pegged the yuan to the greenback. But over that period its currency has swung up and down against those of its trading partners and competitors. On a trade-weighted basis the yuan is back to where it was when the financial crisis started. Indeed, compared with China’s emerging-market competitors in its big export markets, the yuan is about 12% more expensive today than it was before the collapse of Lehman Brothers, according to a measure (the “third-country” effective exchange rate) calculated by the Hong Kong Monetary Authority. By this indicator China’s currency is about 25% above its level in 2005.
The second difference is related to the first. Because everybody was pegged to the dollar in 1971, everybody had to pay the surcharge. Nixon dismayed everyone but discriminated against no one. China’s critics today, on the other hand, urge Mr Obama to slap a tariff on Chinese goods alone. This will reduce the demand for Chinese imports, which constitute about 15% of America’s total. But there is no guarantee that customers will switch from Chinese goods to American ones instead. They are more likely to buy from China’s rivals in Asia. The surcharge may change the composition of America’s trade deficit, without necessarily changing its size.