Focus on Chinese Imports and not the Yuan
Posted by Michael A. Kamperman on November 10, 2009
Next Next week President Obama is scheduled to travel to Asia. He will go to China and the early word is he intends to confront Chinese leaders about their manipulation of their currency the yuan. It does not float freely against the major currencies of the world like the dollar, yen, pound, and euro. Instead the yuan is fixed to the dollar at an exchange rate that is too low and it gives China a competitive advantage in competing for exports against almost every other nation in the world. It also makes imports in China expensive thereby encouraging domestic production. President Obama and most world leaders would like to solve their economic problem of creating jobs by expanding exports to other countries. China’s cheap yuan is an obstacle to achieving this goal. If the global economic pie were expanding then China’s cheap yuan would be an annoyance. But because the pie is shrinking other nations are jealously eying China and looking for ways to either gain some of China’s export jobs or get some of the jobs they shipped to China back. Also, most nations not only want a bigger share of China’s export market, they want a bigger share of China’s domestic market. The concept of rebalancing global trade is a good thing as long as it is about having China buy a lot more from us, not sell less to us. It is a good thing as long as it is focused on expanding the global economic pie and not focused on getting a bigger share of a shrinking pie. China has had to pivot its economy to focus more on the domestic market in order to maintain its economic growth targets because global trade has shrunk by almost 20% in the last year.
President Obama risks a global trade war if his focus is on cutting China’s share of global trade rather than on having China open its markets to outside competition more quickly. The value of the yuan is not main the problem. It is merely one of the tools China uses in its strategy of shipping as much as it can in finished goods to everyone else and buying as few finshed goods as it can from everyone else. The President needs to emphasize that trade with the U.S. and other developed nations is on a quid pro quo basis. China never should have been allowed to manipulate its currency. But because China is actually the world’s second biggest economy, then any abrupt change in yuan policy could cause unintended consequences. It is best to slowly position the yuan to float over time and in the short run to focus on having China quickly open its domestic markets to world exports.
President Obama will not be able to solve the America’s economic woes simply by focusing on exports. The U.S. economy is currently around $14 trillion and global trade ex-U.S. is currently around $11 trillion. Of this amount about 40% is regionally based between neighbors, similar to our inter-state commerce. Additionally, approximately 20% of global trade is energy related. This leaves about $5 trillion worth of ocean-crossing tradable goods and services above and beyond the $1 trillion we already have. Other nation’s are not going to willingly turn their share over to us. If ocean-crossable global trade expanded by 50% and we captured 50% of the increase, it would still represent less than 10% of the U.S. economy. Never mind the question of how will the world grow 50% if the U.S. consumer is forced to sit on their wallets? What President Obama should tell China is to open up their markets or we will shut ours. Then, he should come home and work on fixing the broken credit markets and creating jobs for Americans whereby they make and sell things to the world’s number one consumer, namely other Americans.
