Depressed Yuan, Equivocal Yawn

Recently, a few friends asked me about my next op-ed’s topic, and my accurate reply—“the U.S.-Chinese exchange rate”—struck with a deafening blandness. I tacked on with a mumble, “Maybe I’ll come up with something more interesting.” Unfortunately, I haven’t.

I stuck with it in part because I had this reassuring (and at least somewhat true) statistic to bolster me: 86 percent of Americans are concerned about the yuan-dollar exchange rate. They are worried about China. Per a recent Gallup poll, a majority of respondents, 51 percent, called themselves “very concerned… about trade relations with China.” Another 35 percent expressed some concern. (Notably, only one percent professed absolutely “no opinion”—among them, apparently, the people I call friends.) Ultimately, to be concerned about “trade relations with China” almost necessarily entails concern about the yuan-dollar exchange rate. Presidential hopeful Mitt Romney has vowed to brand China as a currency manipulator on day one of his presidency; meanwhile, Barack Obama has verbally (sans the legal ramifications Mr. Romney supports) labeled China as a manipulator and, although not tied to currency manipulation, also levied tariffs on Chinese tire imports.

Here is the manipulation tale, in short. The Chinese government accumulates large quantities of foreign, especially U.S., assets. The outflow of Chinese capital to achieve this tends to depress the world price of the renminbi, or “people’s currency,” better known as the yuan. In the face of cheaper Chinese imports, U.S. competitors suffer and employ fewer Americans. Studies have placed job losses anywhere from 200,000 to 3 million. A giant, veritable “sucking sound,” as Ross Perot put it.

There are, however, a few less visible (or, in the case of Perot’s sucking sound, less audible) mitigating factors. For one, goods made in China aren’t exactly Chinese goods. A study by the San Francisco Fed determined that, “on average, of every dollar spent on an item labeled “Made in China,” 55 cents go for services produced in the United States.” That’s in contrast to 36 cents repatriated on imports from countries other than China. That 19-point spread matters—especially because a higher exchange rate will likely shift, not eliminate, imports. Moreover, Baizhu Chen, professor at USC’s Marshall School of Business, points out that the San Francisco Fed’s value-added numbers reveal a $70 billion surplus for the U.S. in its trade with China, not the official, towering deficit.

For mitigating factor number two: Whatever the trade imbalance, currency manipulation doesn’t drive it. Research by Peter Navarro of UC Irvine attributes a mere 11-12 percent of the “China price” (the price advantage of Chinese goods in the U.S. market) to currency manipulation. Among other factors, government subsidies and low domestic wages hold more weight, especially the latter.

Finally, another mitigating factor is important to consider. The yuan is rising. Since a strict dollar peg was removed seven years ago, the yuan has risen 40 percent against the dollar, adjusting for inflation. And The Economist’s appealingly named Big Mac Index, which measures purchasing-power parity through McDonalds’ iconic sandwich, tells more. The raw index shows the yuan as undervalued. But that doesn’t account for an additional variable, unrelated to currency manipulation: lower GDP-per-capita countries like China tend to have cheaper currencies (through lower productivity and lower wages). Factoring in this exogenous trait, The Economist finds near-parity between the yuan and the dollar.

Probably less trustworthy, the Chinese government has echoed this claim. But perhaps it’s begun to realize its nation doesn’t even benefit from its own manipulation. China buys U.S. assets, and then sends the U.S. more and more manufactured products—all in exchange for the precious opportunity to spend long hours making those products, dump the revenue back into U.S. assets to depress the exchange rate, rinse, and repeat.

All of these words above, of course, merely amount to mitigating circumstances. But they are appended to the fact that cheap Chinese goods have greatly benefited U.S. consumers, especially the poor, who dedicate a disproportionate amount of their income to consumer goods. That’s worth preserving, and there’s a dangerous alternative scenario that threatens: a war of trade sanctions. To those relying on mutually assured destruction as a deterrent, imports aren’t warheads. Even two longtime partners, the U.S. and E.U., waged the long and bizarre “banana wars” trade battle, which germinated with E.U. banana sanctions and spilled over into luxury goods. If oblong, yellow fruit can ignite a trade war, anything can.

In the end, the core issue isn’t currency manipulation, especially as steeply rising Chinese wages obsolete any true ill effects (China has already risen above India and Mexico in manufacturing outsource costs). Intellectual property violations remain endemic, dampening innovation in both America and China. And that accompanies a broader Chinese atmosphere arrayed against foreign business, including domestic favoritism through subsidies, certification rules to block foreign products, and other regulations. In that light, we should be “concerned about trade relations with China.” But the ballyhooed exchange rate is merely a distraction. Abroad and at home, the United States finds itself confronted with real, critical problems. Both candidates realize that. But they refuse to realize: Chinese currency manipulation isn’t one of them.

Brian L. Cronin ’15, a Crimson editorial writer, lives in Mather House.

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