Now that the Senate has passed legislation clarifying and possibly expanding the grounds on which action could be taken to counteract currency manipulation, self-styled free traders have joined Beijing in launching a blizzard of criticisms aimed at vilifying the bill.

The main arguments are that, if passed into law, the bill would trigger a relapse into the kind of protectionism that caused the Great Depression, that it would launch a trade war, that, in any case, it would not work because it would not lead to any significant change in the U.S. trade deficit or in U.S. job creation, and that it would be found to be in violation of World Trade Organization rules and boomerang on the United States by leading to sanctions against U.S. exports, and that it would trigger retaliation by China against a range of U.S. economic interests.

Before addressing each of these critiques, let's establish the widely acknowledged facts. Virtually unanimously, economists agree that China and several other countries are engaged in currency manipulation. They further agree that such manipulation is aimed at promoting growth and employment by subsidizing exports and penalizing imports. It is also agreed that this manipulation is distorting markets, fostering dangerous imbalances, and retarding recovery and job creation in the United States and elsewhere. It is further agreed that the International Monetary Fund, the G-8, the G-20, the WTO, and the World Bank all have a responsibility for redressing such manipulation and that they have all tried and failed to do so.

In view of these facts, the charge of protectionism stemming from Senate action is hard to sustain. In the first place, the bill is aimed at redressing a market distorting practice, not at introducing some impediment to trade. If there is not illegal currency manipulation there will be no action under the bill's provisions. Secondly, the Senate delayed passage of the bill time and again as it waited for the responsible global institutions to fulfill their mandated responsibilities. It is only in the wake of their failure to do so that the Senate finally acted. So this is hardly an emotional dash to protectionism. Third, the bill would not result in any automatic or across the board increase in tariffs or barriers to imports. It has been widely reported in the media that the bill would raise tariffs in imports of Chinese goods. But this is so far over-simplified as to be untrue. The bill would require that a complaint be made on a case by case basis that some particular product was being subsidized by currency manipulation. Then that case would have to be adjudicated through the U.S. and perhaps ultimately the WTO trade complaint procedures. Indeed, it is this fact that give rise to the argument that the bill would not work. I'll deal with that in a moment, but for now the point is that the whole thing is structured in such a way that it would be impossible for it to have a Smoot/Hawley kind of impact.

The charge of trade war also rings hollow. If the Senate is passing a bill aimed at redressing the effects of policies and practices that everyone agrees are in contravention of the spirit and letter of global trade rules and that are also harmful to important members of the global economy, how can that be a declaration of war? Indeed, wouldn't it be more accurate to describe the currency manipulation policies and practices as a declaration of war in view of the fact that they were implemented as a matter of strategic economic policy and without any outside provocation?

Indeed, many years ago, Japan's Finance Minister Takahashi Korekiyo commented that "it is much harder to recover from an economic defeat than from a military defeat." Currency manipulation is not something new. Competitive devaluation was a much more important cause of the Great Depression in the 1930s than the Smoot/Hawley tariff. It was precisely to prevent a repeat of the devastating effects of such practices that the IMF was constituted in the wake of World War II. We should make no mistake about it. Currency manipulation is a declaration of war and we are already in the midst of a trade war. It is not yet as bad a trade war as that of the 1930s, but it is a war nevertheless. The premise of the global economy and the global economic institutions is that we live in a world dedicated to free trade. The facts are otherwise. The truth is that the world is divided. It is half free trade and half mercantilist and those two doctrines are inherently hostile to each other no matter how much they try to cozy up.

The "won't work" critique is odd. If those who make it truly believe the bill won't work, why do they then make a fuss about it? One feels that the critics protest too much. It is also an odd critique because it suggests that prices don't matter. In other words, those who make this argument are saying, in effect, that a substantial rise in the value of artificially depressed currencies and thus of the prices of the goods priced in these currencies would have no impact. Some say this is because such goods are no longer made in America and others say that any rise in currency values would simply drive production to other countries with lower labor costs. But, this supposes that production of some of these goods could not be re-started in the United States, that moving production from say China to say Vietnam or India is readily doable, and that such a movement would have no effect on the United States. But these presuppositions are all highly questionable. Of course, some kinds of production may not come back to America but others that are not labor intensive certainly could. Moreover, the argument totally overlooks the tendency a rising yuan would have to inhibit further off-shoring of U.S. production to China.  Finally, if production moved from a fairly controlled market to a more open one, is it not possible that such a move would trigger growth that might result in more imports from the United States?  Of course, it is.

Whether the bill would be found to be in violation of WTO rules is debatable. In any case, it would take quite some time to find out and the adjudication process would provide ample opportunity for the international institutions to respond to the bill by fulfilling their official mandates. Moreover, the WTO rules explicitly contain language objecting to use of currency manipulation to offset the effect of tariff concessions. It should not be difficult to bring the bill into conformity with WTO rules if there are any doubts and the White House could always preempt the bill by filing a complaint under the designated language with the WTO.

Finally, there is the question of possible Chinese retaliation. The critics take this as a given. But wouldn't it be foolish for the Chinese to retaliate against a measure that Beijing itself says won't work and that no international body has yet found to be outside the rules? Wouldn't that in itself be evidence that China is operating outside the rules? Indeed, doesn't the assertion of inevitable Chinese retaliation implicitly reveal a subtle anti-Chinese bias on the part of the supposed friends of China who make it by implicitly revealing that they expect China to operate outside the rules. I do not have such an expectation and so I am not so sure that China would retaliate. But the possibility that it might is not a good argument for neglecting to pass legislation that is aimed at redressing an inappropriate market distorting practice. It's like saying you shouldn't complain about being held up because the stick up guy might shoot you.

The real problem here is not the legislation. There wouldn't be any legislation if over the past twenty years, our presidents, the global institutions, and the free traders making these criticisms had insisted on full, reciprocal implementation of the global rules. The fault is not in our Senators. It is in our free traders.