Wednesday, October 6, 2010

Me on Fox Business (Again) Talking China Currency

On Monday, I taped a segment with FOX Business discussing China currency and the potential effects of the currency legislation that passed the House of Representatives last week.  

video

The clip is short, but I've made the points raised therein many, many times on this blog.  The legal stuff that reporter Rich Edson mentions is handled here, and the economics are pretty straightforward: revaluation could very well hurt, rather than help, the US economy because--
(i) since very few Chinese imports are directly competitive with stuff made in the United States, a significant appreciation in the yuan won't help many US companies and will lead to higher prices in the US; and 
(ii) almost half of all Chinese imports are capital goods and equipment used by American manufacturers to stay globally competitive, so higher priced Chinese goods would hurt many manufacturers.  
For more on these points, I highly recommend this must-read op-ed by Warren Meyer, who asks "Why Are Democrats Promising to Raise Prices?":
Apparently Democrats are facing an odd problem in this election. For all the gnashing of teeth about gridlock and obstructionism, they actually have a pretty full basket of legislative accomplishments: The stimulus bill, cash-for-clunkers, Obamacare, financial regulation, and expiration of the Bush tax cuts. The only problem is that no Democrat seems to want to run on this record (and rightly so given how poorly much of this legislation polls).

So, despite having a fairly activist domestic legislative record, Democrats have chosen to seek out a new issue for this election: China-bashing. In particular, Democrats claim the American manufacturing base is declining in the face of unfair competition from a Chinese government that is unfairly helping its own manufacturers through currency manipulation and export subsidization.

To which I say: So what?

We should be thrilled that the Chinese government and its people see fit to spend their own money to subsidize lower prices for American businesses and consumers. Last week, President Obama put substantial pressure on the Chinese prime minister to revalue Chinese currency, a revaluation that would have the effect of raising prices of all Chinese goods in the United States. What possible sense does such a move make, particularly in a recession?
Indeed.  Meyer uses lots and lots of great data to prove his points, most of which I've also mentioned here.  But be sure to read the whole op-ed here.   It's well worth your time.

2 comments:

Anonymous said...

On point (i), under even the most conservative estimates the RMB is undervalued by 20%. Allowing the RMB to float to its proper valuation would certainly make many more American products competitive with Chinese imports - which would be correctly priced by market forces at prices 20% higher than they are.

On point (ii), that means over half of Chinese imports are consumer goods and inputs that could be sourced (at least partially) from American producers. So many more manufacturers would be helped than would be hurt.

You also fail to mention (iii), that allowing the RMB to float will make American products more competitive in China as their price to Chinese consumers will drop by 20%. So currency valuation will do more to open the Chinese market than almost any other measure on the table.

Scott said...

Hi anon,

Thanks for your comment. Unfortunately, pretty much everything you say here is based on faulty assumptions. I highly recommend you surf through my blog's "currency" and "manufacturing" archives to research the issue for yourself. I don't have a lot of time right now, but here's a quick snapshot of some of the incorrect assumptions:

"under even the most conservative estimates the RMB is undervalued by 20%."

INCORRECT ASSUMPTION: No reputable economists have stated that the RMB is undervalued by less than 20%.

INCORRECT ASSUMPTION: Someone knows with utter certitude what the RMB is worth.

INCORRECT ASSUMPTION: The United States has a right to tell other countries how to value their currencies.

"Allowing the RMB to float to its proper valuation would certainly make many more American products competitive with Chinese imports - which would be correctly priced by market forces at prices 20% higher than they are."

INCORRECT ASSUMPTION: A large portion of American-made goods are directly competitive with Chinese products; thus making Chinese goods more expensive will help a lot of US manufacturers.

INCORRECT ASSUMPTION: Chinese goods wouldn't simply be replaced by (slightly more expensive) goods from other low-cost markets like Vietnam.

INCORRECT ASSUMPTION: Chinese manufacturers are vertically integrated and thus wouldn't benefit from RMB appreciation (through lower-cost imported inputs).

"that means over half of Chinese imports are consumer goods and inputs that could be sourced (at least partially) from American producers. So many more manufacturers would be helped than would be hurt."

INCORRECT ASSUMPTION: there is broadbased direct competition between US and Chinese manufacturers, when in reality there is far more complementarity than competition (p.s. "capital goods and equipment" are "inputs.")

INCORRECT ASSUMPTION: the benefits to the few American manufacturers due to RMB appreciation outweigh the welfare loss that all other American businesses and consumers (particularly poor American families) would pay through higher prices and less choice. (See, e.g., the steel industry, where steel users outnumber steelworkers by 40:1.)

"You also fail to mention (iii), that allowing the RMB to float will make American products more competitive in China as their price to Chinese consumers will drop by 20%. So currency valuation will do more to open the Chinese market than almost any other measure on the table."

INCORRECT ASSUMPTION: Manufacturing exports are the key to American economic recovery, particularly employment.

INCORRECT ASSUMPTION: (again) Chinese manufacturers don't import most of their inputs and thus would lose competitiveness due to RMB appreciation.

INCORRECT ASSUMPTION: China is currently a huge market for the high-end, high-tech products in which America specializes.

INCORRECT ASSUMPTION: Appreciation of China's currency has a measurable affect on bilateral trade flows (i.e., it'll ensure more US exports to China and fewer Chinese imports into the US).

+++

OVERALL INCORRECT ASSUMPTION: Simplistic economic models about trade and currency (based on outdated Keynesian theories that fail to account for global supply chains) should drive American trade policy.