On Saturday morning, the People’s Bank of China, that nation’s central bank, signaled a change in their yuan exchange rate policy,saying they will allow the currency to move off the two year old 6.83 yuan/dollar “peg”, but in a controlled, “managed” way.
The new policy will likely allow the yuan to rise gradually against the US dollar (since almost everybody thinks the yuan’s pegged value is lower than where it would trade in a free market.)
This is on balance good news for America, but not for the reasons that Democrats like Chuck Schumer, who have been attacking China’s “undervalued” currency, suggest.
Schumer and friends believe that a rising yuan will, by making Chinese goods more expensive, cause some products which are made in China now to be manufactured in America. Schumer and friends hope for that outcome because they want to boost the dying American private sector unions. Schumer is right that it will make Chinese goods more expensive but he’s wrong that the impact will be more American manufacturing to any substantial degree, especially for low-value-added products. This is for two reasons: First, the strong union presence in those sorts of industries in America are a large reason those industries have all but disappeared; no rational manufacturer will move production back to that environment, not to mention the rapidly increasing tax rates, which the US offers. Second, even if the effective price of labor in USD terms in China increases because of the revaluation, any shift in manufacturing will simply move production towards other very-low-cost-of-labor Asian economies such as Thailand, Vietnam, and India. The US will probably never again be – and hopefully never again will be (a point lost on all Democrats and many Republicans) – competitve in the production of low-value-added products.
So, purely from the point of view of the American consumer, the changing Chinese exchange rate is likely to be a small negative: it will cause the price of many things we use every day, things which are made in China, to increase.
However, that negative is probably dwarfed by the positive impact of avoiding a trade war or even lesser trade skirmishes and squabbles as well as engendering at least modestly increased cooperation on other issues. Every time some idiot politician talks about getting China branded a “currency manipulator”, they put stress on an important geopolitical and economic relationship. Not only do the Chinese purchase a lot of our debt, keeping our interest rates low, but we also need their help from time to time in the United Nations and on other international stages, these days particularly in dealing with Iran. The Chinese are strategic competitors, not allies, but they are certainly not the enemy. Needlessly antagonizing them, especially when those barbs come from people whose understanding of economics is limited to finding ways to spend other people’s money while demagoguing about the evil rich, is very bad foreign and economic policy.
Therefore, to the extent that China’s move lessens or removes the ability for Schumer, Geithner and others to verbally assault China, the likelihood of China working against us on major issues is diminished. For that, the extra few cents that we’ll pay for products at WalMart is probably worth it.
That said, those few cents add up: our average level of imports from China over the last 5 years is about $300 billion annually. For every 1% that the yuan revalues upwards, that represents a cost of $3 billion each year to American consumers. If the Yuan were to move 10% over several years, which is certainly possible, we’re talking about at least a $30 billion a year increase in cost to America, (plus the additional sales tax on that $30 billion.) This is nothing to sneeze at and represents a very real negative for our cost of living.
I support China’s move because I believe in free markets and because it reduces some political tension between the countries. However, while the move by China might represent a small political victory for Treasury Secretary Tim Geithner, don’t believe the hype when the Obama Administration spins the new Chinese policy as an unvarnished positive for America.