Exchange rates dominated the agenda at the IMF's annual meeting recently. Officials blamed exchange rate imbalances on everything from China's undervaluation of the Yuan to unilateral currency intervention by Japan. Currencies will likely dominate the agenda again when G-20 leaders meet in November.
But the key question has been ignored by policy makers: Why should Americans be upset if the Chinese government keeps the Yuan undervalued?
The standard explanation is that China's cost advantage, the product of government policy, is artificial. And that is true. Indeed, Chinese citizens should resent this wasteful abuse of their resources. But America benefits from the policy errors of Beijing: this policy is effectively a Chinese subsidy given to American consumers.
This manipulation of the currency by China is in our benefit, because a weak Yuan makes Chinese goods cheaper for American consumers, making us wealthier and China poorer. Conversely, a weak Dollar enables others to buy our goods and services at low prices, subsidized by American taxpayers.
By buying clothing from China, to use one example, American labor and capital are freed to be employed in other, more productive fields. If we prevent this Chinese subsidy being gifted to us and reject cheap Chinese goods, American consumers will pay higher prices. There may be more jobs here, but we will all be poorer.
If a weak currency is somehow advantageous, we could devalue the dollar by 50% and immediately become so much more competitive. Ofcourse we will also be giving away valuable goods and services for less than what they are worth.
Letting free markets set the exchange rate is the best policy for both countries. But in its absence, a strong dollar is in the best interests of the United States, even if the Chinese fail to grasp this. Artificially stimulating the country's exports by devaluing the dollar is not a good way to achieve prosperity or create jobs.
Moreover, the purpose of trade is to serve consumers, not create jobs. The ultimate goal is the productive use of equipment, not the manufacturing of that equipment. So what if the Chinese are taking over manufacturing? Specializing in the production of other goods and services in which we are more efficient than the Chinese, we Americans will be much better off.
As Professor Donald Boudreaux from George Mason University Economics department notes, devaluation creates more trade, but not better trade. It doesn't matter how many dollars exchange hands, but what they buy, because voluntary exchange is not sum-zero. It is positive for both sides, and this concept, although not always intuitive, is crucial to understanding economics.
Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at aschram@wellcappartners.com.
And this manipulation you talk of. Isn't that kind of what the federal reserve and interest rates do here in america?
And no, outsourcing labor to China is not good for America. I don't know how you came to such a ridiculous assumption. Have you not seen the factories closing and the huge unemployment rate?
Maybe you should start to watch and learn a little bit from the Chinese bankers
OFFSHORE his kind!
I was in Peking as a tourist few years ago, at that time they were renovating the Forbidden City. I saw only laborers and no machinery at all. Even in Peking there were no excavators, with tram lines crisscrossing the city I doubt they can bring in heavy equipments. At the hotel we were staying in there were always people walking in look for a job most of them from the rural countryside. When I asked the tourist guide why don't they use machineries as this would speed up the work, she said it is not allowed because the people need jobs.
China (the PRC & Taiwan) need Western markets FAR MORE than the West need ANYTHING China offers. Cheap labour can be had from Calcutta to the Cameroons.....
The West should begin to CUT China off WHERE it HURTS! Unemployment will breed the disorder,strikes, and chaos that "Chinese civilization" so much abhors! Bring it on!!!
Hedge fund manager/used car salesman - no difference. Only there to turn a 'buck', damn the people.
lala economics from LaLa land.
No informed economist would agree that an artificially depressed yen is a good thing for America, at this point.
"By buying clothing from China, to use one example, American labor and capital are freed to be employed in other, more productive fields."
That's the line our politicians have been giving us for 25 yrs., and would, if presented by a first year Economics student at a credible university - fail. It's not happening - China grows strong - we grow weak. They're not just making cheap clothing and electronics - they have parlayed that to building all those 'advanced technologies' jobs; those deemed by the writer as the only acceptable.
A country must export 'goods', all these wonderful service sector jobs do nothing but to recycle capital; being eroded by inflation as we go.
India is setting up law and accounting offices, training employees in U.S law and accounting practises and principles - guess which jobs go next.
Think of a healthy economy as a pyramid - it needs a wide and strong base, which is manufacturing and export, to support the rest.
They don't advise people to turn-over their car monthly - just to collect a commission.
Actually, I'm having a difficult time trying to think of a less trustworthy group than the financial services sector.
How silly, it's blatantly obvious - Politicians of ALL stripes.
Good - case closed.
If you don't have a job you can't buy things. Delegating our manufacturing to another country leaves us in a vulnerable position. Protections to wages and the environment are almost non-existant and the only time they become relevant is when a spotlight is shown (usually after major damage).
Also the small fact that China is a COMMUNIST COUNTRY. When did freedom become something that is disgarded for profit?
Actually, the "subsidy" makes it almost impossible for anyone to compete with Chinese manufacturing. The artificially low currency helps China destroy its competition and helps power a massive technology and industrial shift to China. China is not subsidizing America, it is buying America.
The question is, once China has nothing to gain from devaluing its currency how will it use trillions of dollars of bonded American productivity and reserves?
but the fact is workers in both us and china are exploited by wall street and speculators like you
Technology alone does not win wars, Germany was the technology leader at the onset of WWII - tanks, planes, submarines, weapons. They lacked the capacity to mass produce. The US on the other hand had capacity in spades and that was known as "the arsenal of democracy"
Civil War. The industrial north had a clear supply advantage over the free trading and agrarian south- rebel prisoners were often captured wearing tatters and barefoot. The north won despite the south having the most experienced and superior leadership.
How can we solve this? Require by law that all shareholders vote pay and pay increases for any officers of any publicly held corporation. Right now, the CEO and the board decide for themselves, by law. That's the real disaster. As an analogy, imagine you own a restaurant, and your manager and assistant manager decided to pay themselves 10 times the going rate, and you have no legal recourse to stop them (I realize you're a 100% owner here, but bear with me). Your restaurant goes under, and your management staff walks with all the cash. That's how corporations are doing it these days because the owners are all so small share that they can do nothing about it.
We don't get more wealthy if consumers can't consume because they are out of work. If free trade is exclusively consumer focused, that it is too limited a philosophy to address the countries economic problems which are rooted in unemployment and low wages.
However the focus on currency in manipulation is probably just a cop out because Obama doesn't want to admit that the entire concept of free trade is unworkable, particularly if we want to employ our people, give them decent wages and protect our environment with high labor and evironmental protections. Under free trade the corporations get to undermine each and every one of these goals, through labor arbitrage.
It is also silly to just focus on China, when we are also losing jobs to Mexico, India and Viet Nam.
access to cheap (read as poor quality and unsafe) goods is no measure of prosperity
what new jobs and productive purposes that come as a result of outsourcing? still waiting for the answer to that one
1. "A weak yuan makes China poorer and us wealthier". China 30 years ago wasn't really that involved in international trade. Today it exports billions of dollars worth of goods to the world. Your argument is that those goods could be worth say, 10 billion with a strong yuan instead of 6 with a weak yuan. I bet the chinese are thinking, we had nothing and we have $ 6 billion today.
2. "So what if the chinese are taking over manufacturing?" Besides the obvious fact that a strong manufacturing base creates good jobs (and a middle class), I am not sure what can replace manufacturing in industrialized nations.
Germany and Japan still have strong manufacturing bases. It is possible to maintain a strong industry if you focus on value added, technologically sophisticated manufacturing.
And financial services will not do the trick. It is a support industry, like gas you put into a car. But it doesn't create wealth.
3. My last point. trade imbalances. You can wax poetic about a post industrialized economy but the fact remains that we have a gigantic trade deficit with.............China. I also suspect that China manipulates its currency because it watches its trade balance closely.
Simply put, we don't export enough and live above our means while China exports a lot and gets richer.
Don't get me wrong, I think free trade is good for everybody. But it doesn't hurt to take a closer look.
2. We manufacture more than any other country in the world. Tracking our manufacturing output over the last few decades shows that we have doubled it over the same 30 year time period. Manufacturing jobs have been lost, but technology and efficiency has made our base stronger than ever.
3. Looking beyond the way that the trade deficit is calculated (applying the finished price rather than the value added in China), and the fact that exports to china have been growing faster than imports from China (with imports from other countries increasing), we can look at the heart of this issue. There is a trade deficit with anyone who works a service job in this economy. They have ready access to manufactured goods, and they do not worry that they don't produce all of their own shirts, shoes etc in their own home. They don't even purchase all of their manufactured goods from the people to whom they provide a service. Should the service employee worry about his trade deficit with his manufacturing neighbor?
2. its been known for some time now that the production numbers are artificially inflated becase they do not adequately account for the growing amount of foreign made content
3. trade deficit with china hit another record high this month