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The Wall Street Journal: October 8, 2010Beijing
Many Americans believe that the Chinese government is manipulating its currency, thereby stealing American jobs and entrapping the U.S. in an ever-deepening trade deficit. The People's Bank of China announced in June that it will allow the yuan to appreciate—a statement we should take at face value, since the Chinese government won't risk unnecessary isolation.
But even if the yuan does appreciate, it's unlikely to reduce the U.S. trade deficit or create American jobs. Indeed, the currency war being urged by some American politicians would open up a Pandora's box for the U.S. economy.
Regardless of the yuan's value, the U.S. trade deficit won't be significantly reduced unless the U.S. boosts its chronically low savings rate and defuses the disincentive—caused by the dollar's status as the global currency—for manufacturing. When other nations want imports they must produce goods to send abroad. All the U.S. needs to do is print more greenbacks: Buy dollar-denominated commodities and goods with dollars and debt, and service the dollar-denominated debt with dollars and more debt.
It's little wonder manufacturing is dying in the U.S. while Wall Street is prospering. And it's no coincidence that Germany produces robust machinery, while the U.S. produces dazzling financial derivatives. Many items in Wal-Mart are made in China, but the trade deficit is made in the USA.
Second, Washington can't afford a weak-dollar policy—because the only thing standing between the U.S. and a Greek-style sovereign debt crisis is the dollar's status as the global currency. A weaker dollar would threaten that status. Within 20 years, according to the Congressional Budget Office, U.S. debt is projected to equal 140% of gross domestic product (GDP), and this doesn't even include the budget troubles of state governments. In Greece, debt is a mere 115% of GDP.
For now the Fed can absorb difficulties because, unlike Greece, the U.S.'s public debt is denominated in its own currency. But that might not always be the case. Many countries have already begun seeking refuge in reserves of currencies other than the dollar, and since December 2006 there has been more value circulating in euros than in dollars. The collapse of the dollar as the global currency is not an impossibility.
Third, a strong Chinese yuan would reduce Americans' real income, further weakening U.S. demand and perhaps ruining the fragile U.S. recovery. Before a strong yuan created any U.S. jobs in manufacturing, it would kill jobs (at Wal-Mart and elsewhere) that depend on Chinese imports.
A stronger yuan would also mean that less Chinese trade surplus is recycled in the dollar assets and securities that finance U.S. growth and subsidize low U.S. interest rates. Without low interest rates and accessible capital, many U.S. companies will go bust—especially the small businesses that drive job creation.
Fourth, a strong yuan would disrupt China's rapid growth, which is facilitating the country's gradual transition from an export-oriented model to a consumption-oriented one. That, in turn, would severely dampen Chinese demand for U.S. exports. "In the second half of 2009," according to Treasury Secretary Tim Geithner in his July report to Congress, "U.S. exports to China increased by 15 percent on a year-over-year basis, while U.S. exports to the rest of the world fell by 13 percent. In the first quarter of 2010, U.S. goods exports to China rose by more than 40 percent compared to the same period the year before, while U.S. exports to the rest of the world rose by less than 20 percent."
Fifth, drastic appreciation of the yuan would threaten the Chinese government's sacred goal of building a harmonious society. A strong yuan would force out of business many export-focused companies that account for Chinese GDP and job creation. Yes, a strong yuan would help the Chinese economy be less labor intensive and more capital intensive, which would move China up the international economic food chain. But China hasn't found a model better able to absorb its abundance of employment seekers than labor-intensive production.
Building a harmonious society is the Chinese government's most important imperative. Once a Chinese person can make a living, he rarely challenges authority. No one should ever underestimate the Chinese government's determination to defend the bottom line.
All this means that the U.S. should adopt a collaborative approach toward China. Now is a bad time for confrontation. The U.S. currently needs China more than China needs the U.S. China's cheap labor and capital are good for American corporations. All China gets in return is more greenbacks. If the Chinese start to believe that it's just useless paper, that will be very bad news for America.
Mr. Woo teaches in the economics department at the Beijing Huijia Private School.
Many Americans believe that the Chinese government is manipulating its currency, thereby stealing American jobs and entrapping the U.S. in an ever-deepening trade deficit. The People's Bank of China announced in June that it will allow the yuan to appreciate—a statement we should take at face value, since the Chinese government won't risk unnecessary isolation.
But even if the yuan does appreciate, it's unlikely to reduce the U.S. trade deficit or create American jobs. Indeed, the currency war being urged by some American politicians would open up a Pandora's box for the U.S. economy.
Regardless of the yuan's value, the U.S. trade deficit won't be significantly reduced unless the U.S. boosts its chronically low savings rate and defuses the disincentive—caused by the dollar's status as the global currency—for manufacturing. When other nations want imports they must produce goods to send abroad. All the U.S. needs to do is print more greenbacks: Buy dollar-denominated commodities and goods with dollars and debt, and service the dollar-denominated debt with dollars and more debt.
It's little wonder manufacturing is dying in the U.S. while Wall Street is prospering. And it's no coincidence that Germany produces robust machinery, while the U.S. produces dazzling financial derivatives. Many items in Wal-Mart are made in China, but the trade deficit is made in the USA.
Second, Washington can't afford a weak-dollar policy—because the only thing standing between the U.S. and a Greek-style sovereign debt crisis is the dollar's status as the global currency. A weaker dollar would threaten that status. Within 20 years, according to the Congressional Budget Office, U.S. debt is projected to equal 140% of gross domestic product (GDP), and this doesn't even include the budget troubles of state governments. In Greece, debt is a mere 115% of GDP.
For now the Fed can absorb difficulties because, unlike Greece, the U.S.'s public debt is denominated in its own currency. But that might not always be the case. Many countries have already begun seeking refuge in reserves of currencies other than the dollar, and since December 2006 there has been more value circulating in euros than in dollars. The collapse of the dollar as the global currency is not an impossibility.
Third, a strong Chinese yuan would reduce Americans' real income, further weakening U.S. demand and perhaps ruining the fragile U.S. recovery. Before a strong yuan created any U.S. jobs in manufacturing, it would kill jobs (at Wal-Mart and elsewhere) that depend on Chinese imports.
A stronger yuan would also mean that less Chinese trade surplus is recycled in the dollar assets and securities that finance U.S. growth and subsidize low U.S. interest rates. Without low interest rates and accessible capital, many U.S. companies will go bust—especially the small businesses that drive job creation.
Fourth, a strong yuan would disrupt China's rapid growth, which is facilitating the country's gradual transition from an export-oriented model to a consumption-oriented one. That, in turn, would severely dampen Chinese demand for U.S. exports. "In the second half of 2009," according to Treasury Secretary Tim Geithner in his July report to Congress, "U.S. exports to China increased by 15 percent on a year-over-year basis, while U.S. exports to the rest of the world fell by 13 percent. In the first quarter of 2010, U.S. goods exports to China rose by more than 40 percent compared to the same period the year before, while U.S. exports to the rest of the world rose by less than 20 percent."
Fifth, drastic appreciation of the yuan would threaten the Chinese government's sacred goal of building a harmonious society. A strong yuan would force out of business many export-focused companies that account for Chinese GDP and job creation. Yes, a strong yuan would help the Chinese economy be less labor intensive and more capital intensive, which would move China up the international economic food chain. But China hasn't found a model better able to absorb its abundance of employment seekers than labor-intensive production.
Building a harmonious society is the Chinese government's most important imperative. Once a Chinese person can make a living, he rarely challenges authority. No one should ever underestimate the Chinese government's determination to defend the bottom line.
All this means that the U.S. should adopt a collaborative approach toward China. Now is a bad time for confrontation. The U.S. currently needs China more than China needs the U.S. China's cheap labor and capital are good for American corporations. All China gets in return is more greenbacks. If the Chinese start to believe that it's just useless paper, that will be very bad news for America.
Mr. Woo teaches in the economics department at the Beijing Huijia Private School.
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