Free Trade Vs. Economic Health

The Weekly Standard has a pretty good article about the recent gyrations of the dollar in comparison to other currencies and how it might and does affect us in the US.

As I read the article one of the key points I picked up on was this:

Since China and Japan are intervening in currency markets to prevent the dollar from getting dearer in terms of their own currencies, the brunt of the readjustment is falling on the euro and sterling. And a heavy brunt it is. The euro is now above $1.20, a record, and the pound is above $1.70. That has made goods manufactured in Europe and Great Britain more expensive in America and, in the case of the eurozone, where domestic demand is weak, threatens to turn no-growth into slump.(emphasis mine)

The problem with Europe plunging into a contractionary environment is that it is one of our larger trade partners. The budding recovery in the US is still vulnerable. If our European partners become unable or unwilling to purchase from us, it could very well spell the end of the our expansion.

The author also points out how the Euro and the Pound absorbing the entire effect of the weakening dollar can harm the US economy through higher oil prices:

Oil prices have remained above the top of the OPEC cartel's target range of $28 per barrel. But producing nations are finding that they can buy less with their dollars. Whereas the Saudis would once have had to sell about 5,000 barrels of oil at the top of the cartel's price range in order to earn enough dollars to pay for a brief, £100,000 visit to their favorite haunt, London's Dorchester hotel, they now have to sell about 6,000 barrels at that same price to pay for enough sterling to cover the cost of their stay. So, they have in effect abandoned their $28 ceiling, and are keeping production low enough to support prices in excess of $30 to offset the reduced purchasing power of their dollars.

Bush asked for restraint. But Saudi oil minister Ali Naimi isn't restraint minded. So he used last week's OPEC meeting to announce, "The dollar is weakening, and purchasing power is quite weak, so [the current high price] is okay." After all, Naimi wouldn't want to risk his job, and possibly his neck, by allowing the living standards of the 5,000-7,000 Saudi princes to decline. Bad news for American consumers.

So what's the answer? The problem really seems to lie in China's insistence (and Japan's to a smaller degree) that they will not allow an appreciation of their currency vis-á-vis the dollar. I'm not a big proponent of tariffs and restrictions, but I am starting to wonder if we may be at a point where our overall economic health would be best served by artificially "creating" an effective depreciation of the dollar versus the yuan and the yen. I hate the idea of our going down the road of protective tariffs, or even worse yet of a twenty-first century Hawley-Smoot, but if the alternative is allowing them to push our economy back into recession through their own protectionist monetary policies, well which evil is the lesser evil?

At what point does our national economic health trump the ideal of free trade? It's an interesting question.