Friday, 14 October 2011

A devalued renminbi makes wealthier Americans

A point Don Boudreaux makes in this article at U.S. News & World Report‘s “Debate Club”. We should add that it makes for wealthier New Zealanders as well. Boudreaux writes,
The U.S. government should not respond to China's allegedly undervalued renminbi by raising taxes on Americans who buy imports.

The lower the value of the renminbi the wealthier it makes Americans. Ultimately, the goal of trade is to import goods and services. Exports are a cost; they're the price paid for imports. By keeping the value of its currency low, Beijing enables Americans to stretch our dollars farther. This results in significant improvements in living standards.

University of Chicago economist Christian Broda explains, "In U.S. stores, prices of consumer goods have fallen the most in sectors where Chinese presence has increased the most." Prof. Broda also finds that the benefits of low-priced Chinese goods flow disproportionately to poor Americans, dampening the effects of income disparities. Low-priced consumer goods are good for Americans regardless of why the prices are low.
Boudreaux conitnues by pointing out the effects of a globalised supply chain.
A higher-value renminbi (as opposed to threatened U.S. tariffs) won't necessarily achieve the hoped-for rise in the prices Americans pay for Chinese goods. Supply chains today are global, so many of the components that Chinese manufacturers use are imported into China from elsewhere. If the value of the renminbi rises, Chinese producers' costs of acquiring these components decrease. The resulting fall in Chinese production costs enables producers there to cut prices. Lower prices of Chinese finished products would offset, perhaps significantly, the higher prices Americans would pay even with a higher-valued renminbi.
Basically an "artificially low renminbi" means China is making the rest of the world wealthier at its own expense. Why are we complaining?

1 comment:

soups said...

China and Madoff Fraud Parallels and How All U.S. Trade is Adversely Affected

The New York Times October 4, 2011 editorial: The Wrong Way to Deal with China starts with the sentence, "China is undeniably manipulating its currency." If China's currency manipulation is undeniable, it follows that the Chinese economic miracle to a greater or lesser degree is a product of the perpetration of a fraud. China's currency manipulation (1994 -- 2011) is the most recent fraud, in terms of duration, to rival the Madoff Ponzi scheme (pre-1989 -- 2008). This begs the question: Why have these frauds gone on for so long?

With regard to China's currency manipulation, the vast majority of commentators are divided into two factions: those who deny that China engages in currency manipulation, and those who contend that China keeps its currency undervalued. Only a handful contend that China actually keeps its trading partners' currencies overvalued.

Madoff observers were similarly divided, with the vast majority denying any fraud at all, and others contending that Madoff was defrauding brokerage customers to enrich his investors, but not defrauding his investors. Only a handful believed Madoff was defrauding his investors, via a Ponzi scheme. The Madoff's Ponzi scheme shook America's confidence in our financial markets to the core.

The ramification of whether a country is keeping its currency undervalued as opposed to keeping its trading partners' currencies overvalued is not inconsequential. From the perspective of U.S. exporters an undervalued Chinese currency acts as a tax only on exports to China, whereas an overvalued U.S. Dollar acts as a tax on all exports from the United States. Since exports to China are about 1/14th of all U.S. exports, an overvalued U.S. Dollar is 14 times as damaging to the American economy as an undervaluation of Chinese currency, all other factors being equal.

From the perspective of U.S. exporters, an undervalued Chinese currency should only concern our exporters to China, while an overvalued U.S. Dollar should concern all American exporters. China's manipulation of the Dollar taints all U.S. trade, therefore priority one should be to stop China's manipulation of our currency before the United States even considers entering into any more free trade agreements (FTAs). Entering into additional FTAs before China's manipulation of the Dollar is stopped is analogous to building a castle in the sand.

In Chapter 19 of his 1817 classic, On the Principles of Political Economy, and Taxation , David Ricardo, the father of political economics, warned that war, the removal of capital, and a new tax are destroyers of the comparative advantage which a country before possessed in manufacturing. The new tax that Ricardo writes about need not be a tax assessed within the United States. Taxes on our exports by our trading partners would suffice to destroy the comparative advantage which the United States previously possessed in manufacturing.