Hands Off the Yuan

The escalating calls for China to rebalance its currency are based on deeply flawed assumptions and will only make Americans pay more for their favorite products -- like iPhones.

BY DAN NEWMAN, FRANK NEWMAN | MARCH 16, 2010

Pick something up from your desk or countertop, anything at all. Chances are that it was made in China. We just tried that experiment -- and our clock and stapler came from Chinese factories, along with $296 billion of other goods imported into the United States last year.

Those imports are the driving force behind calls for a stronger Chinese yuan and the renewed threat of a congressional bill to add a 27.5 percent tax on Chinese products -- calls that China has pushed back against, with Premier Wen Jiabao reiterating the country's determination to keep the yuan "basically stable." And both are based on the assumption that if the yuan is more expensive relative to the dollar, U.S. domestic production will rise and the U.S. trade imbalance will fall. But neither assumption is correct.

For one, U.S. domestic production is actually rising -- even if employment in manufacturing is not. The percentage of jobs in the sector has dwindled from 20 percent of the total in 1979 to 10 percent today, not due to China so much as U.S. innovation. Over time, manufacturing has become more automated and efficient, and factories now produce more goods with fewer workers (many of whom have transitioned into the service industries). The United States today produces nearly a quarter of all global goods, up from about a fifth a decade ago -- even with fewer employees. The problems of the American factory worker are real, but cannot be solved with trade embargoes against Beijing.

China's dramatic manufacturing growth over the same period makes it look like Guangzhou has stolen jobs from Detroit. But the growth of China's manufacturing sector, and its accompanying jobs, came at the expense of other countries in Asia, not across the Pacific. Televisions and audio equipment that once came from Japan, for instance, are now made in China. By 2007, Japan produced 6 percent less of the world's goods than it did in 1995 while China produced 7 percent more, rising to an 11 percent share of the global total. Goods once made in Thailand, Malaysia, and Singapore are increasingly made or assembled in Chinese factories. What is striking about all those items on your desk is not how many are made in China, but how few are made in other Asian countries, even ones with low-cost workers and friendly trade policies.

Making Chinese products more expensive in the United States will do nothing to shift production to U.S. factories. Let's say that a certain kind of cell phone costs $100 if made in China and $200 if made in the United States. Using tariffs to increase the price of the Chinese version to $130 does little to make the domestically produced version more attractive, and nothing to encourage local hiring. Furthermore, increasing the value of the yuan does not increase U.S. exports by making them cheaper abroad. If the yuan rises in value, it does not spur Germans to start driving Fords.

STR/AFP/Getty Images

 SUBJECTS: CHINA, EAST ASIA
 

Dan Newman is a writer and economics researcher in Seattle. Frank Newman is chairman and chief executive officer of Shenzhen Development Bank. He is a former chief executive officer of Bankers Trust, chief financial officer of Wells Fargo and Bank of America, and deputy secretary of the U.S. Treasury.

MR. SNIPS

10:05 PM ET

March 16, 2010

Great Article

I want to read the counter argument.

 

ERICJ

10:34 AM ET

March 17, 2010

There are so many holes here.

iPhone example: Of that $4, how much is outrageously polluting shipping? How much is actual labor? If they close this hole it may move elsewhere in Asia, at which point the US might raise tariffs on everything coming in. This is not a horrible thing. It would raise prices, but not in excess of the cost to build it in the US where technology makes production more efficient. Instead of sending $4 to China and more to adversaries in oil-producing countries for transportation, half that difference would instead be paid to US workers that would pay taxes and buy more goods that are presumably made in the US. The ripple effects could be quite positive for the US, but bad for global stability since the Chinese would get the shifted job losses from the US.

Trade deficit: Your argument reminds me of people that think spending less on something they don't need was saving money. That is, your math is wrong. Before, $10 was spent on 10 items, which was $100. After, $13 is spent on 8 items, which is $104, but only $80 of that is the merchandise. China produces 20% less, less fuel is used for shipping, and the federal government gets $24 that it never would have seen before (and this should be the sole source of income for the federal government, as it was for most of the history of the US).

Tariffs are not bad things. They sometimes reduce consumption, but they also change where the money goes, and if applied carefully they can result in considerable positive effects. Our current downturn is a combination of too much labor, too little actual value generated (service sector is too large), too much efficiency, and too many people. Reducing a trade deficit is not going to make this worse, and will likely make it better.

The downside is that such a change could result in inflation of the USD, and if China lets the Yuan float, it would then rise in value against the USD if the tariff is too low, or drop in value against the USD if the tariff was too high. I suspect that even at 27.5% it would be too low.

 

ASGOLD25

1:20 PM ET

March 17, 2010

You raise some very good

You raise some very good points, but while allowing the Yuan to appreciate against the dollar may not bring jobs back to the US, it would certainly increase the purchasing power of ordinary Chinese. Citing your statistic that the US comprises about 25% of world production, I'm willing to bet that many of the consumer products that those Chinese would be buying will be made in the USA.

 

MAURICIEN

5:07 PM ET

March 20, 2010

You raise some very good

It is not about $4 anymore, the previous author should look at how and at what the labor cost for the American equivalent, I don't think the labor input is the same.
Next the previous author wants us to return to our system of trading, does he want to kill globalization.
I like you to answer , how is it going to increase the Chinese purchasing power, when the jobs that provide the purchasing power are moved to India or Vietnam, then you have to solve the problem with India or Vietnam. Remember four Chinese workers live in one room for that $4 input. that is the reason Apple send the jobs to China.