China's Currency

I'm sure you have all heard about how China's yuan is undervalued compared to the U.S. dollar, and how this is supposedly damaging our economy and causing American workers to lose jobs. This argument has been all over the news, and more recently, both Republican and Democratic candidates' campaigns.

For example, this article "China-Bashing Gains Bipartisan Support." In addition, articles about China's currency have made headlines in the New York Times for the past few weeks.

However, have we considered any opposing arguments, or at least views that believe there are better solutions to deal with the economic crisis?

In my class "Gateway to Global Affairs," we discussed alternative perspectives. First, some background info: right now, with the yuan undervalued, exports are cheap for China and imports are more expensive. On the other side of the coin, imports from China are cheap for the U.S. and it is costly for U.S. manufacturers to export to China. Therefore, if the yuan appreciates, Chinese imports will become more expensive for U.S. consumers.

The main argument in the media seems to be that if we forced China to appreciate its currency, goods from China would be more expensive, making our domestic manufacturers more competitive, so American jobs would increase. However, why would jobs move from China to the U.S.? This is not a world that only consists of two countries. It makes sense that job creation would occur in the next low-cost producer, such as Vietnam and India. It is not likely that jobs would return to the states. So are politicians just using China as a convenient scapegoat for our economic problems?

Who is benefiting from artificially-cheap Chinese imports? Largely the American lower-middle class (think Wal-mart shoppers). So why the disconnect?

On the export side: change in currency may make U.S. products cheaper in China, so this may benefit American export manufacturers. However, Chinese savings rates are far higher than the rates in the U.S., so it is not certain that Chinese citizens would spend that much more money on imports. A good policy may be for the Chinese government to encourage more consumption among their citizens. Stephen Roach argues for this approach in the NY Times. He's the chairman of Morgan Stanley Asia.

Stephen Roach also teaches at Yale. Funnily enough, he's actually the sponsor for our Global China Connection chapter.

This image is courtesy of http://www.icis.com/blogs/asian-chemical-connections/2010/04/.