New column: China syndrome

Right now China's low currency is subsidizing the American consumer. If the value of the Yuan rises, the "subsidy" decreases. I am skeptical a higher valued Yuan will create enough jobs here in the US to make up for the loss of this subsidy.

The problem is that increasing the RMB relative to the US dollar won't come anywhere close to solving our international trade deficit. China is currently moving up the supply chain and thus imports a good deal of the parts for their products that ultimately make their way to our shores from neighboring Asian countries. What will happen is that the revaluation will end up either (1) reducing our trade deficit with China but shifting our trade deficit to these other countries as the stronger RMB causes a bypass and shift in production to other areas or (2) cause an upsurge in inflation in the United States due to higher import prices on goods from China since we cannot easily alter our own supply chains. In such a case, a revaluation could actually increase our trade deficit from China. Still, possibility #1 is far more likely than #2 given economic theory and the ability of American firms to alter their sourcing patterns. Indeed, one almost certain effect is that the stronger RMB will boost oil imports to China due to the effective cheapening of the resource, thus increasingly the worldwide price of oil and negatively impacting our trade deficits with the Arab world.

As for the increase in exports to China that the US would see, that depends, in larger part, on liberalizing the nascent consumer market in China. Given the high value/quality of US goods relative to Chinese goods, it is likely that this impact will be small, given the relative poverty of Chinese consumers. Thus US employment will likely increase only marginally and only in those industries that do exporting to China (or that compete with exports from China to third countries). Industries that, on the other hand, import heavily from China will find their costs rise and may take a hit on employment. The fact is that with the unemployment rate running at 4.6% virtually NO ONE in the United States is being hurt by Chinese imports while virtually all consumers are being helped. Indeed, the impact of higher prices from imported goods will likely require raising interest rates and result in an INCREASE in unemployment in the United States.

Continuing that point, the Chinese trade deficit has had positive impacts on the US mortgage market since the Chinese government has recycled its dollars into US treasuries. It is the extreme imbalance of savings versus investment that is causing this trade imbalance and that imbalance must be corrected in order for our trade deficit to narrow. However, a surge in savings (or decline in investment) would do dramatic harm to the US credit and mortgage markets at this precarious time. It would be better for the US to adopt the Chinese 'go slow' approach and attempt to redress its own economic basket case prior to making pronouncements about perceived imbalances in exchange rates, which may not actually exist.

Indeed, are we really ready for what might be the biggest impact of such a revaluation? While Chinese consumers are not in a place to purchase US goods, Chinese companies would be in a much better position to purchase US COMPANIES! With over a trillion dollars sitting in the till and with a rising RMB, what would stop companies (and also the Chinese government through its investment arms) from aggressively purchasing US public corporations? Far from 'punishing' China, RMB revaluation may put the US on a 'fire sale.'

Sincerely,

Zagros Madjd-Sadjadi
Assistant Professor of Economics
Winston-Salem State University
Winston-Salem, North Carolina
Co-author of Modern State Intervention in the Era of Globalisation (Edward Elgar, 2007)