MY COLLEAGUE at Democracy in America writes to clarify his view of an aggressive American approach to China's renminbi policy, and I still am struggling to see things his way. I've been trying to pinpoint precisely where our views diverge, and I think there are actually several disagreements. He begins his reponse by saying:

I don't buy the argument that China is hamstrung in its ability to make trade or currency policy by its citizens' nationalism. Its citizens' interests are a different matter.

The argument that retaliatory actions against another country are futile because they will only anger that country's nationalist constituents is an argument with roots in fields like human rights and nuclear non-proliferation. In those contexts it's a very strong argument. In fields like human rights, freedom of expression and rule of law, or on issues like Tibet, there is virtually nothing outsiders can do that will affect internal Chinese policy, and while America cannot be seen to condone gross abuses, taking aggressive stances is generally unproductive. The perception by both leaders and the general public is that outsiders have no business interfering in these issues. 

Trade disputes are different. They involve credible interests on the part of the importing countries, which the exporting countries must and do take seriously. Ultimately, it's our money. There's no way to pretend that the importing country has "no business" intervening in a trade issue. So trade disputes just don't generate the same kinds of resentment against outside interference as human-rights or security disputes. Yes, the exporting country's public generally sees trade actions as part of a scheme by foreigners to keep them down, but that resentment mostly gets filed away and doesn't much affect government policy decisions.

Two points. First, I find the attempt to draw a distinction between the human rights case and the economic interest case to be entirely unconvincing. I fail to see how an America that can't get China to agree to cease human rights violations can somehow get China to cease pegging its currency. It's certainly clear that America doesn't make as big a deal about human rights issues as economic issues because America sees that it has more of a domestic interest in intervention, but that has nothing to do with how effective intervention is likely to be. In either case, America has the leverage it has. What's more, it's inappropriate to pretend that negotiations on one issue are irrelevant to negotiations on other issues. Confrontations with China over economics should explicitly take into account the likely effect of those confrontations on other international problems, from China's domestic human rights issues, to instability in North Korea and Iran, to climate change. America is involved in one, long, many-faceted negotiation with China, which is one reason the decision to push a hard line on the currency issue is so fraught.

Second, it is difficult, actually, to make the case that China is preserving the currency peg based on the interests of its citizenry. The case was stronger in late 2008, when global trade collapsed and China was looking to prevent a total industrial meltdown (and when appreciation against the dollar would have meant extremely rapid appreciation against most other currencies). At this point, the effect of appreciation on the Chinese would be somewhat ambiguous, but there is good reason to think that an orderly rise in the RMB would generate net benefits. Which is why China is hinting that revaluation is just a matter of time, and which is why it is silly to make it more difficult for China to revalue by roiling domestic political conversations with a newly aggressive approach.

Here's where the disagreements really pile up:

But if America thinks the undervalued RMB really is a problem, both because of its effects on American workers, its effects on America's macroeconomic imbalances, and its global contribution to instability; and if America thinks that blanket tariffs on Chinese imports would help correct those imbalances in the absence of revaluation, then absent some other convincing argument against them, America should implement such tariffs and seek agreement with other importing countries on harmonising them. That this will make a nationalist Chinese public angry is not much of an argument against doing so...

There is no world in which China refuses to revalue, America slaps tariffs on China, and then we all go on our merry way. China will either retaliate—with tariffs of its own or via new depreciation—in which case America's bluff has been called and things can only get worse, or China will reluctantly agree, America's current account deficit will not much change (since many Chinese exports will merely become exports from some other emerging market nation, and since America will still import gobs of petroleum), and America's relationship with China will be decidedly more frosty—which could potentially be extremely costly. Which isn't to say that revaluation wouldn't be positive on net. It's simply to say, as I have been saying, that revaluation cannot produce benefits large enough to be worth the potential downside risks of an aggressive strategy.

To get more deeply into the weeds, it's clearly true that with China having re-prioritised growth over stability in the context of the global recession, local government officials and Party cadres are going to be opposed to RMB revaluation or anything else that interferes with their ability to report back high growth figures from their provinces, and forestall embarrassing factory closures and unrest. This is the clearest sense in which Beijing's "freedom of movement" is likely limited. But if you accept that RMB undervaluation is a major problem and is indistinguishable from broad export subsidies, then to say that America should do nothing to respond to it is to say that we should run a trade deficit and put our own manufacturers at a disadvantage to help maintain political stability and the popularity of the government and Communist Party in industrial regions of China. That's where it seems to me that we would be taking responsibility for something that is none of our business. China is responsible for its own internal politics, and is quite capable of handling them.

I don't know what it means to say that china has re-prioritised growth over stability. Where China is concerned growth is stability. But the broader point is that America's trade deficit has relatively little to do with the RMB peg. Revaluation would reduce it somewhat, but much of the imbalance in the Sino-American relationship stems from structural factors on both sides, which would persist. Meanwhile, America continues to run persistent current account deficits with plenty of other trading partners against whose currencies the dollar floats. Europe, for instance.

And I am absolutely not advocating that America do nothing in the face of the Chinese peg. There are mutually beneficial deals to be struck, and America should seek to strike them. And I think consistent but polite pressure with respect to the RMB peg is appropriate.

It seems to me that among economists, the get-tough approach is based on a naive view of American power, and among politicians, the get-tough approach is about the political possibilities of economic nationalism and populism. I have yet to see a clear case for why an agressive move toward more heated rhetoric and tariffs is the respectful, and most effective, way to get what America wants.