Let me get right to the point: A stronger Yuan won't help the US economy and its workers. In fact, it may actually have a disproportionately negative effect on those who are unemployed, underemployed or on the lower scale of incomes.
The US is sqandering precious political capital by pressuring China to strengthen the value of the yuan in order to reduce US imports and help restore output and jobs to the US.
While a weaker currency does make goods produced in China more competitive on the world market, US leaders are mistaken about the effects of this on the US economy and workers.
The weak yuan is diverting jobs and output from Mexico, Thailand and even Japan, not from the U.S. The top 20 products imported into the US from China are in industries that account for less than 5 percent of US gross domestic product. The emerging countries of the world, such as Mexico and Thailand, are China's true competitors on these largely commodity-type products.
The US has high wages associated with the world's highest productivity rates, and so does not have a competitive advantage in the majority of the products imported from China.
The US does produce other goods -- and, notably, services -- that are both competitive and in demand in China. If the US is serious about stimulating sustainable growth in US production and employment, it should implement policies that encourage investment in these high-value-added products and services, rather than attempting to stimulate production of goods that represent America's past. If the US wants China's assistance in reducing the trade deficit, it should pressure Chinese leaders to allow their workers to become consumers, which would lead to increased exports of these US-produced goods and services.
The table above lists the top 20 categories of products that the US imports from China. These account for 75 percent of US imports from China, but less than 5 percent of US GDP. The top three Chinese import categories combined -- computers and peripherals, communications devices, and apparel -- constitute nearly 31 percent of total US imports from China but less than 1 percent of US GDP. Put in plain English: One third of the US imports from China amount to 1 percent of our total production -- little wonder that the Chinese feel unfairly targeted. And don't take my word for it -- the numbers come from the US Department of Commerce and the US Bureau of Economic Analysis. We are literally fighting over pennies on the dollar. The Chinese and the rest of the world know this. That's why we aren't getting any international support on this issue. It's also why other developed nations are focusing on increasing their exports to China, concentrating particularly on the higher-value-added components of the equation.
The 2004 Economic Report of the President made the point that rising Chinese imports were taking markets from Mexico and other developing nations rather than US producers. The reverse is equally true -- foregone imports from China will be replaced by imports from Mexico, Thailand and even Japan, where they are produced more cheaply than in the US, but at a higher cost to the American consumer. This will have the same effect as a regressive tax.
A stronger yuan will not have a meaningful effect on US production because of the disparity between the products imported from China and the capacity to produce those same products in the US. In fact, the trade deficit might worsen if the yuan's appreciation increases the prices of these imports, and would be exacerbated if they came from even higher cost producers, because in the end, they would still be imported!
Additionally, the low level of US production of these goods is not a result of the rising level of imports from China. The majority of the categories in the table have been in structural decline since before the US trade deficit with China surged. The US industry that has experienced the most significant reduction in size relative to the overall economy over the last decade is motor vehicles, an industry in which the Chinese do not yet compete globally.
Trade benefits all parties involved so long as trade patterns are determined by comparative advantage, meaning each country exports products in which it is competitive due to a greater availability of resources or productivity compared to cost.
The US has an advantage in producing capital equipment, robotics, audio and video content, sophisticated services such as insurance, banking, and real estate, and large-scale agricultural products. Accordingly, these industries command large shares of the US economy, led by professional and business services at 12 percent, real estate services at 13 percent, financial and insurance services at 8 percent and health care at 7 percent.
The US $132 billion annual trade surplus on services and $121 billion surplus on income earned abroad are often overlooked in trade discussions, taking a back seat to the $500 billion deficit on goods.
Instead of pressuring China to help move the US economy back to producing products for which it long ago lost its comparative advantage, the US should be working to expand the buying power of Chinese workers who now save close to 40 percent of their income. This, combined with an opening of their financial and other service markets to US providers, would be the best way to reduce the US-China trade imbalance.
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