In early October the US Senate passed a trade bill to pressure China to appreciate its currency, adding yet more heat to deteriorating trade relations with its biggest creditor. However, punishing China, while politically helpful, will not reverse America’s fortunes
By Miaojie Yu
It is not the first time that Capitol Hill has labeled China a currency manipulator which has crippled US exports and stalled US job growth. We’ve heard this song many times, and this latest Senate bill is no more than an additional verse. Tensions have been stoked by snowballing public discontent against sluggish economic growth which has culminated in the “occupation” of Wall Street by disgruntled members of the public.
If this bill passes into law, it will force the American Department of Commerce to impose high import tariffs on Chinese products to add the value to goods that, lawmakers believe, the yuan should already be adding. A trade war looks more likely than ever, something the rest of the world would prefer to avoid. The reason is simple. The Chinese economy relies on offshore markets. Its trade volume accounts for two thirds of its GDP, much larger than the US’ one fourth. Once high import tariffs are imposed, many Chinese exporters will shut down, almost guaranteeing social unrest. There is no reason to expect that China will take this lying down.
The yuan has already appreciated by more than 20 percent since July 2005. One of my studies finds that a 10 percent appreciation in the value of the yuan would reduce Chinese exports to the US by 16 percent. Put another way, the recent 20 percent appreciation has reduced the US trade deficit with China by 32 percent. Hardly small potatoes.
Whether appreciation of the yuan can help the US job market is a far less clear-cut question. True, a stronger yuan means less Chinese imports to the US. However, the US still has to import the bulk of its labor-intensive products such as textiles from someplace else – Indonesia, Vietnam or Malaysia. A more expensive yuan will simply change the nationality of sweatshop laborers, not revitalize America’s job market. Americans still aren’t making their own clothes. However, American consumers will pay a premium for Nike, Gap and American Apparel’s love of outsourcing - many Chinese goods enjoy a stranglehold on the American market simply because they’re cheaper than equivalents of an equal quality from smaller countries.
Processing trade, in which Chinese manufacturers buy raw materials or components from other countries for processing or assembly before exporting the finished products to industrialized nations, accounts for more than 50 percent of China’s export revenue. In 2010 China’s entire US$180 billion trade surplus came almost exclusively from processing trade, despite the narrow profit margins. For every US$209 spent on a new iPod Touch, US$200 is created outside of the Chinese assembly lines, leaving them a total profit of US$9 per product.
The answer to US trade woes is not to reduce imports from China, but to increase exports. Jobs will not be created in the US by shutting down developing economies – only US firms can create US jobs. More US imports would also benefit China, taking the heat off Beijing’s US$3.2 trillion in foreign exchange reserves by reducing a massive and unsustainable trade surplus and reducing inflation. In a trade war, nobody wins, but the US can turn this situation to its advantage by revitalizing the manufacturing sector that made the US the world’s number one economy. Only that kind of affirmative action will keep it there.
The author is an associate professor with the China Center for Economic Research (CCER) of Peking University