My big concern is that all the focus is on the negative side of China’s undervalued currency. Krugman (above) and others, correctly, complain that it artificially reduces US competitiveness. If the yuan floated, the price of US goods in China would slide dramatically. Rationalist Chinese consumers would move toward suddenly cheaper US goods, and that gets you the export boom Obama talked up in the State of the Union. (Although Asian buyers are stubbornly nationalistic. The home country bias here is extreme, so don’t get your hopes up for some big US export surge to Asia. You’ve never seen as many Korean cars as you will in Korea…)
The downside of course is that the poorest Americans benefit most from the undervalued yuan, and their unorganized, underprivileged, and non-corporate voice is completely unheard in this debate. The poorer you are, the more it matters to you that Chinese imports at Walmart are super-cheap. By definition, the tighter your family budget constraint, the proportionally more valuable low consumer prices are. The undervalued Chinese currency ensures that all that consumer stuff imported from China and sold at the big box stores like Walmart and Target helps the poor stretch the dollars. The purchasing power of their fewer dollars goes farther when Chinese imports cost so little.
1. So the poorest benefit the most proportionally from the undervaluation. Why doesn’t that make the news? Because the poorest are also the least political organized, and consumer interests are generally far less well-organized than business interests. So US exporters, who would benefit from a weak dollar, scream, and Congress listens. US consumers benefit enormously from a strong, especially overvalued, dollar. But their voice is disaggregated and diffused across the country, compared to the concentrated corporate power of exporters. Consumer gains from a cheaper Chinese-Walmart stuff is far smaller and diffused than the steep and concentrated pain of exporters suffering from a strong dollar. This is a classic protectionist response: gains are diffused, hard to see, and enjoyed by the weakest, while pain is concentrated, easy to indentify, and felt by the politically privileged.
None of this means that the yuan isn’t overvalued. It is, and the world’s largest economies clearly have a systemic responsibility to let their currencies float. The distortions coming from China’s currency are downright bizarre, with China’s foreign exchange reserves at levels never seen in the history of finance before. But if you wonder why DVD players that used to cost $20 at Walmart suddenly cost $30, now you’ll know. And while you, the middle class reader, might not care because that is within your disposable income range, recall that the poorer you are, the more that extra $10 means. The more overvalued the US dollar, the more America’s poorest are helped.
2. The temperature is rising on China’s currency. The US Congress is starting to seriously pressure the US Treasury to formally label China a ‘currency speculator.’ DoT must once again decide in mid-April. Krugman (above) got the ball rolling on the argument that the US should finally come out and openly accuse China of manipulation for its nationalist/mercantilist trade purposes. And just about everybody seems to agree that the yuan is overvalued. Just how undervalued is the yuan? 49% (!!) according to the Economist and 40% according to the Peterson IIE. For what it’s worth, I certainly agree with these estimates. I don’t think anyone really believes the dollar currently reflects its real purchasing power in Asia. US goods are ridiculously expensive in Korea; a fifth of Jack Daniels costs about $40!
3. All these Asian countries want their currencies undervalued because of the nasty lesson they learned in the Asian financial crisis. Most Americans don’t know this at all, it seems. 15 years ago, Asians did not have the dollar reserves to defend their currencies and when capital flight hit, these economies were turned upside down. Indonesia’s government collapsed into anarchy, Thailand lost something like 1/3 of its GDP, and South Korean couples were donating their wedding rings for gold to the government to pay its foreign debts! In short, the region got turned upside down/inside out, and everybody out here remembers this, while Americans just missed it altogether. So afterwards, the Asians did exactly what the DoT and the IMF told them to – they balanced their books and stocked up dollars in case there would be another crisis.
4. Here is good background on the conflict; try this too. To place the China currency evaluation in the global context, read this excellent introduction to the current problems of the global economy, specifically the problem of ‘imbalances.’ In brief, the US and Mediterranean countries are spendthrifts now carrying huge piles of debt, while Germany, China, and other Asians are overthrifty supersavers. So the broke Americans have no more money to spend to prime the global economy, and the supersaver Asians should fill in the gap by buying a lot. The more stuff they buy, the more people will be hired to make all that stuff they are buying. This will reduce unemployment. So the supersavers are the key to getting global unemployment down, because they have the cash to go on a spending spree.