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## Will a Yuan “Revaluation” Help American Manufacturing?

Not likely.

First, a brief summary of the idea. Right now the Chinese Central Bank buys and sells US Dollars with the aim of keeping the Chinese RMB, the Yuan, pegged at a rate of 6.56RMB to the dollar. In other words, each yuan is worth 15.2 cents. I’d remind readers that the Chinese simply do not “peg” the Yuan by decree. They have to intervene in currency markets to do this.

Some folks argue that the Chinese “artificially” manipulate this yuan/dollar exchange rate to be higher than it ought to be (devalued). That the Chinese government does not have the right to do what it wishes with its own currency is an odd position to take, especially among folks that look fondly upon the classical gold standard era when the local-currency/gold exchange rate was fixed, implying a global system of fixed exchange rates. But leaving that aside, some folks argue that the yuan is anywhere between 5% and 25% undervalued. Incidentally, some research suggests this is not the case – there simply is no way to know.

Imagine the Yuan is in fact undervalued by 15%. This means that it is 15% cheaper for Americans to buy Yuan (and goods denominated in Yuan) than it would otherwise be. Consider the example of a pair of shoes made in China. Suppose they cost 100RMB in China. This means an American with \$15.20 can use those dollars to purchase RMB and in turn buy the shoes.

What if the RMB were to appreciate by 15%, so some argue the Chinese should “let” it do? Then, the yuan/\$ exchange rate would fall to 5.58 yuan/\$ (or about 17.9 cents per  yuan … note that we’d get different numbers if we started with the \$/yuan exchange rate and increased it by 15% … a fun math exercise is to explain why).

How would our American consumer with \$15.20 fare? If they exchanged those dollars for RMB, they would end up with 84.8 RMB, not nearly enough to afford the shoes. In other words, the appreciating yuan has made goods produced in China more expensive (i.e it takes more (weaker) dollars to buy the (now stronger) yuan) . So an American with \$15.20 to spend on shoes must either come up with a few more dollars to buy them, (about \$2.70) or look elsewhere to buy shoes.

American protectionists and manufacturing interests seem to think that if the cost of buying shoes from China were to increase by \$2.70 (in this example) then suddenly we would have a flourishing of manufacturing expansion in the US. The idea is that since it is more costly for Americans to buy from China, they would naturally just start producing themselves. Such thinking is the height of economic illiteracy (aside from the fact that no one should want to have to do things that are more expensive when they could be done more cheaply elsewhere). And it is the height of economic illiteracy because most (all?)  industries that would likely suffer in China due to a Yuan appreciation would NOT be coming back to America anytime soon.

Such an idea doesn’t pass the smell test. If I walked up to you on the street and asked, “if Chinese shoes got 15% more expensive, do you expect American shoe factories to open up where you live?” I’d think people would look at me funny for even asking.

• Many of the sectors (still low “value” and low-skilled by the way) that are in China right now were in decline in America long before the Chinese “took them over.”
• Moreover, what leads one to think that if shoe prices in China were higher, that manufacturers would locate back here in the United States? There are, to the best of my knowledge, about 200 other countries in the world for factories to locate it and I am pretty sure places like Cambodia, India, and others would seem to be the natural places for relocation, if such relocation ever made sense in the first place. For some evidence on this, one might want to ask how many of the manufacturing jobs that have been “lost” recently actually ended up abroad. The answer is close to zero. For example, one study reported by Dan Griswold in his excellent book Mad About Trade, shows that of the 3 million manufacturing jobs lost during the first 75% of the Bush Presidency, … US owned companies increased their factory jobs abroad by … 128,000. So at worst (and I believe this to be a massive overstatement) 4% of job losses in manufacturing were “because” those jobs went off to China.
• A related point: virtually every single thing that “China” is selling us today was originally being sold to us from other East Asian countries in the first place. For example, East Asian imports to the US in 1990 comprised 38% of all US imports. Today, East Asian imports to the US comprised … 37% of all imports to the US.  I actually do not find this data interesting for a host of reasons, but the protectionist ought to. The point being that rather than buying shoes from Korea or Taiwan today, we are buying them (more cheaply) from China, and the production in Korea and Taiwan, for example, is moving up the value chain much like we are high up the value chain today.
• Perhaps most important, the weak yuan doesn’t just allow American consumers to buy “cheap Chinese stuff.” It helps American producers to buy cheap Chinese stuff too. In fact, for every dollar of “stuff” imported from China, only 43 cents were spend by American consumers on “trinkets and baubles.” The other 57 cents were purchases of intermediate inputs by American firms. In other words, by extending the global supply chain and relying on China to produce inexpensive intermediate goods, American companies are actually able to expand output and employment at home. So if the Yuan were to appreciate, it may hurt American producers instead of helping them as the conventional wisdom suggests. This is an empirical question that is certainly not a priori answerable.
• The Yuan actually appreciated in value by 20% from 2005 to 2008. I encourage folks to see how that impacted the trade deficit and US manufacturing. What, do folks want to say that it needs just a little more appreciation? Sounds like the same argument stimulus proponents are making today.
• Did I remind folks that on many of the products that China already sells us, there are US tariffs already slapped on them, at times exceeding the amount that protectionists claim the Yuan is undervalued? So, if we use our thuggish influence to force China to see its Yuan appreciate, will we be in favor of dropping the tariffs? If so, then net price of Chinese goods will not change? Or do the protectionists want to go further? Continue slapping tariffs on their goods AND force them to revalue? On what grounds other than outright stupid nationalism.

We’ll have much more to say on China in the near future. I think this should be enough to persuade you that the idea that somehow manufacturing will reappear in America if only those damn Chinese would stop stealing those jobs is closer to fantasy than reality.

### 4 Responses to “Will a Yuan “Revaluation” Help American Manufacturing?”

1. Greg says:

I like the second bullet point the best. There’s always going to be a place where people will be willing to work in tough conditions in a low-skill job for low pay. If China stops, then why not open up shop elsewhere?

Also, it’s funny to hear people say, “let’s get manufacturing back in the United States.” So, with your shoe example I say, find me 10 people who will work in the same shoe factory (just dropped in the United States), for 40+hrs/week for less than minimum wage. How many people would raise their hand to that? Zero.

2. Harry says:

Without responding to Wintercow’s observations on free trade, and other astute economic comments, the fact is the Chicoms hold a big pile of debt denominated in US dollars.

Many regard this as a problem, and I have seen commercials on television that show the Chicoms laughing, as if they own us.

But anyone who is a creditor who has money at stake in a default situation knows otherwise. The stockholders hold the upper hand, unless they are forced into the antiquated system of bankruptcy.

The Chinese had to do something with the trillions of dollars they got, so what did they do? Buy treasurys of whatever maturity they chose, plus a lot of supposedly-guaranteed mortgage whatmacallits.

Who can blame the Chinese for making a bad investment decision, and why are we surprised from their reaction? They screwed themselves.

Had they heeded the advice of classical economic advisors, they would have concluded that the United States Treasury would inflate the value of the dollar beyond whatever Keynes could have imagined. When Mao was an infant, this was already happening in Germany.

This gets back to Wintercow’s question about the right of our government to print fiat currency.

I wish the Chicoms would make a similar point, as long as they are upset.

While we are at it, let’s not us talk about our government screewing with the value of the Yuan.

3. Michael says:

The “balance of trade” is one of those economic terms that I think is completely useless for most Americans (and economists). It would behoove us all to focus more on “comparative advantage.”
An interesting sidenote, St. Louis, MO was once know as the shoe capital of the world. There is an onld international shoe factory not far down the street from where I work. Used to be a couple other shoe factories in my town, too.

4. Keeping the RMB undervalued is equivalent to the Chinese giving us free things. Russ roberts and Don Bordeaux (sic.) did an excellent pod cast on this through econtalk last November.