China\'s Currency Too Strong? If

¶ … China's Currency Too Strong?

If the Chinese government revalues the yuan by 20% or more, this would in the long run be a desirable outcome for American consumers. The present situation is not as sustainable for Americans as it is for the Chinese. The Chinese have established their exchange rate as a source of long-term competitive advantage, but this artificial construct distorts the market. With a seemingly boundless source of cheap labor and land, China can maintain the artificial rate for a long time. However, the cost of this is being borne by the American consumer. The current account deficit with China is fuelled largely by the explosion in consumer debt in the U.S. This high level of consumer debt has stretched U.S. consumers to their limits, such that any shock can have a devastating impact on the economy, as the subprime crisis shows. Ultimately, the U.S. consumer needs to begin to scale back their dependence on credit for the overall health of the U.S. And world economies. U.S. domestic policy aside, higher prices on Chinese imports can help affect this change by forcing reduced U.S. consumption.

Moreover, China's resulting loss in competitiveness will benefit other emerging economies. This, along with a reduction in the U.S. trade deficit with China, will provide greater balance to the world's economic order, which is a desirable outcome. In the long run, it will probably give a positive outcome for the Chinese as well, since they will be forced to compete less on price and more on quality. As we've seen with Japan and South Korea, this is the final stage in taking the economy from the emerging stage to the developed stage and China has already started entering this stage, with some factories becoming highly automated (Bradsher, 2005).

2) I do not agree that China is to blame for the U.S. current account deficit, the flood of imports and downward wage pressures. There are a hundred other developing countries that would gladly take China's place as the provider of choice for low-cost consumer goods (Kirchoff, 2005). U.S. consumers and retailers are constantly seeking lower costs and higher margins respectively. This has created the demand for such trade. Before China, it was Korea, Taiwan and Japan who filled this role. Indeed, these same arguments were made in the 1970s with Japan (McKinnon, 2001). The problem is that the U.S. consumer and retailers beholden to shareholders and the need to please the market every quarter are so easily dazzled by the $600 billion in savings that they fail to consider the long-term costs associated with those savings. China's currency policy may make that country the main country with whom the U.S. has a current account deficit, but if not for China the U.S. would have the same problems, just with another country for the protectionists to scapegoat.

3) I think an aggressive legislative posture is the best approach to take with regards to China's currency position. Ultimately, China is an economic actor the same as any other. They are going to do what they feel is best for their country (Wolf, 2006). Thus, in a situation like this where their currency policy is viewed to be doing harm to the U.S. economy, the best approach to make them reconsider such policy is to alter the economics of that policy. Thus, tariffs, sanctions and anti-dumping fines are the most effective means.