On April 15, Barack Obama said that, as president, he would tell the Chinese government, “You guys keep on manipulating your currency, we are going to start shutting off access to some of our markets. If you are doing the right thing and not trying to manipulate your currencies to our disadvantage, then you will have access.”
This isn’t simply campaign rhetoric for Obama. Last July, he co-sponsored legislation with his former rival-turned-pal, Hillary Clinton, addressing the US trade deficit with China (the result of our importing more goods from China than we export to them).
In an election year when the American economy is faltering, it’s politically advantageous to invent a problem and propose a solution for fixing it. The thought process goes something like this: We’re importing more from China than we’re exporting; our manufacturers can’t compete with Chinese prices; we’re losing manufacturing jobs to China; something has to be done.
Enter Clinton and Obama. Since China is intentionally devaluing its currency to attract American business, the Senators want to force the Chinese to increase the value of the yuan. The result would supposedly benefit the US by increasing our exports to China and reducing our imports.
The idea sounds good in a stump speech: “I’ve proposed legislation to reduce our trade deficit with China so that we can bring American jobs back home where they belong.” It sounds good, that is, until you stop and think about the consequences.
Economists will tell you that, while revaluing the yuan (as Obama proposes) would protect a couple of our industries, the overall standard of living for Americans would decrease as a result. Sure, we would make more money on items we sell to China, but we’d also pay more for items we buy, significantly raising the cost of everything we import, including your next iPhone or iPod.
Obama is smart enough to know he can’t deliver on his promise. What’s not clear is whether or not he realizes the Chinese trade deficit isn’t a problem to begin with. After all, it’s not like the Chinese are draining our pockets and filling their own.
We’re a part of a dynamic, global economy. When we import millions of affordable iPods and iPhones from China, much of that money comes back into the American economy, fueling American business and supporting associated jobs. And China doesn’t get 100 percent of the money that doesn’t come back to the US. When producing goods, they buy components from all over the world. In total, less than twenty percent of the value of Chinese exports goes back into their economy. China is simply the last stop on a global assembly line.
If anything, attempting to boost the American economy by reducing our trade deficit with China is overly simplistic. It doesn’t appreciate the world we live in and the nuances of a global economy.
The democratic presidential candidate proposes tackling the Chinese trade deficit because it sounds good on the campaign trail. In the real world where we all live, the math doesn’t add up. Revaluing the yuan might bring a small number of manufacturing jobs back to the US, but the entire country will be stuck footing the bill.
This blog is the second in a 5-part series on China. You can read the previous blog in the series here.
For more information on this blog, see “Reconsidering Revaluation” in the January/February 2008 edition of Foreign Affairs.
Admittedly, I’m not as informed on this subject as I should be, but I do know that one of the reasons Obama is pushing for China’s government to go with this plan is so that the typically underpaid Chinese worker is given a more fair wage, and therefore, a better lifestyle.
I don’t think from that aspect it will hurt the average American’s way of life. It may make some goods more costly, but if we are going to be the globally, and more importantly, human-minded citizens we should be, it is a sacrifice worth making.
Sure they are using this as a campaign spin, but that’s politics. This plan will help some Americans (although making some goods more expensive) and some Chinese.
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I’m interested to see where Obama says that getting the Chinese to revalue their currency (raising it’s value against the US Dollar) would help the Chinese worker be given higher wages.
I don’t claim to be an economist, but it’s basic economics to know that if China raised the value of their currency, it’d make their products more expensive for US consumers to buy (while it’d make US products cheaper for the Chinese). If that’s the case, we would buy less of their products, thereby hurting the Chinese worker.
This article explains it more in depth:
http://www.washingtonpost.com/wp-dyn/content/article/2007/06/15/AR2007061502048.html
China is not devaluing it’s currency, to the contrary it has revalued over past few years. The Europeans might want Yuan to revalue because dolar is really cheap for us and so is the Yuan at the moment as it’s fixed to dolar.
Can’t wait for the next China entry, really eye opening.
China has an obvious advantage by selling and manufacturing goods at cheap prices. There is no possible way we are ever going to compete with countries who can produce as quickly and cheap as they can. Our best bet would be to probably cut off all important goods we are exporting to China.
If I had a vote then I would suggest creating an international trade agreement so that all goods can be kept at a consistent price; thus, giving every country the chance to compete.
This was a very interesting perspective. Don’t know what is on the agenda for the next parts of the China series, but would be interested in the Relevant Elephant’s take on the following two subjects:
1. What are the ultimate reasons for China continuing to subsidize so much of the country’s fuel costs when the rest of the world is paying more at the pump?
2. How much impact will the world economy see due to the halt in production of many chinese factories prior to the summer olympics?