Why China's Undervalued Currency Is Good For America
February 19th 2010 14:53
One of the "hot topics" in U.S. trade policy is the value of the Chinese yuan. Politicians get all in an uproar, because, they claim, China artificially lowers the value of their currency. This makes their exports cheaper, and thus, allows them to run a huge trade surplus with the U.S. Of course, this means the U.S. must run a huge trade deficit with China. A couple points to consider:
1. If China was forced to raise the value of their currency, it would do nothing to change the overall trade deficit of the United States. Trade balances are determined by the gap in domestic Savings and Investment. Thus, the U.S. would just run a larger trade deficit with another country or countries. Unless there is some reason why the Chinese trade deficit matters more than other types of trade deficits, the value of the Chinese yuan means nothing.
2. Consumers in the U.S. seem to make out quite well on the low value of the yuan. It means that they can both buy cheaper Chinese products and cheaper products that use Chinese inputs. If the government of China made their currency more expensive, U.S. consumers would then have to pay more for these goods.
3. It seems silly to complain that China is not accepting enough dollars for their goods! That is essentially what it means for the Chinese to be holding down the price of the yuan. (the following numbers are completely made-up) America would prefer that the Chinese accept 100 dollars for every yuan, but the Chinese are saying "no, we only want 80 dollars in return for one yuan." Doesn't this sound like Americans should be happy to take this deal?
4. So consumers and importers of Chinese goods in the U.S. win from a cheap yuan. So, who loses? First, the Chinese consumers lose, because they are basically subsidizing U.S. consumption. Second, U.S. companies in America that compete with cheap Chinese products lose (or think they do). Third, U.S. exporters lose (or think they do) because they have a harder time than they should selling into the Chinese market. Like with the Buy Local concept I discussed previously, the (real or perceived) interest of U.S. producers gets placed above that of the American consumer. Ultimately though, the wealth of a nation is not about what we sell, but about what we consume. In that regard, a cheap Chinese yuan works in favor of U.S. well-being.
Follow me on Twitter: @AGoldenDoor
1. If China was forced to raise the value of their currency, it would do nothing to change the overall trade deficit of the United States. Trade balances are determined by the gap in domestic Savings and Investment. Thus, the U.S. would just run a larger trade deficit with another country or countries. Unless there is some reason why the Chinese trade deficit matters more than other types of trade deficits, the value of the Chinese yuan means nothing.
2. Consumers in the U.S. seem to make out quite well on the low value of the yuan. It means that they can both buy cheaper Chinese products and cheaper products that use Chinese inputs. If the government of China made their currency more expensive, U.S. consumers would then have to pay more for these goods.
3. It seems silly to complain that China is not accepting enough dollars for their goods! That is essentially what it means for the Chinese to be holding down the price of the yuan. (the following numbers are completely made-up) America would prefer that the Chinese accept 100 dollars for every yuan, but the Chinese are saying "no, we only want 80 dollars in return for one yuan." Doesn't this sound like Americans should be happy to take this deal?
4. So consumers and importers of Chinese goods in the U.S. win from a cheap yuan. So, who loses? First, the Chinese consumers lose, because they are basically subsidizing U.S. consumption. Second, U.S. companies in America that compete with cheap Chinese products lose (or think they do). Third, U.S. exporters lose (or think they do) because they have a harder time than they should selling into the Chinese market. Like with the Buy Local concept I discussed previously, the (real or perceived) interest of U.S. producers gets placed above that of the American consumer. Ultimately though, the wealth of a nation is not about what we sell, but about what we consume. In that regard, a cheap Chinese yuan works in favor of U.S. well-being.
Follow me on Twitter: @AGoldenDoor
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