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.
Great argument and very interesting. Very interesting article. However isn’t it the lower-income wage earners who always shout down globalization and the wicked capitalists for exporting jobs to China (and facilitating Chinese good to the US)? Wasn’t one of the main arguments during the 2008 election that cheap foreign goods (mainly from China) were undercutting domestic productivity? Just examine the last US Presidential election and determine which political party was able to muster populist anger at “American” jobs leaving the US for China?
BTW, Cheap Chinese goods are destroying what meager indigenious markets exists in Africa; although the Maghreb seems to be able withstand this assualt better than sub-Saharan Africans.
I disagree. Imports don’t destroy markets; they destroy producers. African still need to buy stuff, but now the Chinese provide foreign competition to the local producers.
Note also that if Africans (or Americans) wanted to buy African or American, they could. No one compels you to buy Chinese imports at Walmart. You can head off to your local, overpriced boutique store and spend 25% more to support local employment.
The point, it’s not China’s fault. Its OUR fault as consumers. We are the ones who buy their imports.
I will agree with you that is is OUR faults as consumers (in the West) for buying Chinese goods. However to apply the same standards to Africans is incredible. The majority of Africans buy out of SURVIVAL and not want. Yes, there is a percentage of African elites who can discriminate in their purchases but such is not the case. In countries like Zim where they have introduced a 1,000,000 note. Imagine what an African producers must charge to barely make it even in Zim. Imagine what an average Zim citizen must pay for a bar of soap sold by an African merchant. The Chinese merchant has more to invest and more capital and can sell at a MUCH lower cost, his cheap products that are banned in the US for health an safety reasons. Out of a need to survive the Chinese bar of soap is what they can afford.
This is like blaming African Americans on welfare for not shopping at Whole Foods. Poor people in the hood need to eat as well, most of the food that they can afford are less expensive (than the overpriced Whole Foods stuff). I am sure that they would like to be able to shop at Whole Foods and provide healthier food for their families, but out of a need to survive they must buy what they can afford, EVEN if it contains more fat, cholestoral, sodium, etc.
I am on my way to work, but I will write more on this later.
Can you imagine a US politician (regardless of party) extolling the virtues of lower-income families buying cheap (and less durable) Chinese goods in order to promote job creation in China?!
HAH! Its like, sit down and go buy your cheap Chinese goods at Walmart, these Chinese companies have employees that need paid.
Can you imagine when Chinese vehicles really hit the US markets?
Actually, I stay away from Chinese products because of what China is doing to Africa and because I prefer durability (I am not stating that all Chinese products are cheaply made). You can spend a little more money and buy one good product or spend the same amount (or more..travel expenses back to the store etc.) replacing one bad product. Don’t get me wrong, I am by no means an anti-globalist. In fact, I order some of my dress shirts from London. I love it, I call London, speak with the company, give my measurements, et voila, a few weeks later, my shirts arrive.
I am by no means making fun of lower-income families, I have had to work very hard to get where I am, so I DO understand your point. Take fast foods for example. A real plague to African Americans, helping to fuel obesity in that society. Why? Because a ceap $1 or $5 dollar value meal is a lot more inexpensive than buying 93/8 ground beef at the supermarket. Take alcohol as well. You can always tell when you are in an African American neighborhood because supermarkets sells that cheap malt liquor poisin. Malt liquor is a lot cheaper than a six pack of Miller. That stuff will damage your insides. I know, I used to drink it when I was broke.
Very good post though, I had never thought of this subject in this manner.
I sound protectionist, but this is not the case, for I have no issue with Western goods being sold by Westerners in Africa. The dynamics of the relationship has changed for the better. It is a different case with China. However are you REALLY putting the American and African consumer in the same boat?
I write: “although the Maghreb seems to be able withstand this assualt better than sub-Saharan Africans.”
In fact you answered my question. The reason why the Maghreb can withstand this Chinese assualt is because their economy is much better than what Sub-Saharan Africa has and their average citizen has more buying power.
Anyway, I will write more on this later, on my way to work.
I am at work but had to jot this down. BTW, sorry about grammatical errors from my responses earlier this morning. I was getting ready for work, on my way to the dry-cleaners, etc.
Anyway I have found your response very intriguing. Are you saying that Africans are shopping at boutique stores owned by Africans in Kampala, Monrovia, Freetown or Lagos? Stores where Africans mark up their prices over their Chinese counterparts by 25%? And that this in turn leads Africans to buy cheaper Chinese products? Is this the analogy that you are proporting? Having experienced shopping in Africa myself, I can assure you that I never experienced or saw any such example.
I,will, say that Africans are in the state that they are in because of their own inaction at not taking charge of their destinies from the Big Men, and vampire elites that rob them daily; and sell them out to the likes of the Chinese.
A boutique is an economics term term for a specialty or local provider. Boutiques are usually more expensive, have smaller inventories, do not benefit from economies of scale, focus on procurement ‘norms’ like fair trade production or environmental friendliness, and have better customer service and shopping atmosphere.
The point is that such buying habits reflect wealth. The poorer you are, the more the marginal dollar is worth, so the more you like those super-cheap Chinese imports.
I know what a boutique is. This is why I asked you the question. I could just as well have said a local providers. I wasn’t thinking boutique store in the Western sense of the word. I was going to make the example of a boutique that I saw in Africa that catered to whites but didn’t have the time to. My point would have been, that tourists buy this specialized product (in the case sculptures at a very high price), whereas if they went to the village market, they could purchase the same product for far less.
However I do agree with you about this: “The point is that such buying habits reflect wealth. The poorer you are, the more the marginal dollar is worth, so the more you like those super-cheap Chinese imports.”
My point is that unlike Americans who in general have more discretionary income, Africans is general don’t enjoy enjoy this luxury. Even lower-income Americans seem to be able to afford $200.00 per week big screen TVs from Rent-A-Center. I am always surprise when I see inner-city young people who wear tennis shoes that cost more than my wingtips.
You might be surprised to know that there was a large indigenous boutique market in Africa during the 1930-1950s. Dr. Peter Bauer, the great British scholar on Africa wrote on fantastic book on the African Economy during this time frame. Makes sense because this market catered to wealthy European colonials. This industry was destroyed post independence. In some cases, as in Nkrumah’s Ghana, some were nationalized to bad effect.