Thursday, 11 October 2012

Manipulation: China's currency or American voters?

Recently, the Romney campaign issued a statement pledging to label China as a “currency manipulator”, claiming China is cheating. First off, to understand what he means by that on a broad level, he means that China is intentionally undervaluing its currency – because it is able to as a socialist market economy – and this undervaluing in turn hurts the US economy. This artificially low Chinese currency impacts the American economy by making Chinese goods comparatively cheaper in the US and US goods far too expensive for China. A further implication is that due to this price disparity, Chinese laborers are cheaper to hire and manufacturing factories are cheaper to export to China.
So given his plan, what does this mean for both economies? Well mainly, the US will have to set tariffs or other trade barriers in order to allow the dollar to fall relative to the yuan (because right now, its relative price is very high due to this “currency manipulation”). But then what about the long-term repercussions? China won’t be too happy, for obvious reasons, so trade will definitely slow between the two countries. But beyond that, as much as we import from China, China is also still a developing (and quickly, at that) market. So long term, this trade standstill might reduce the global market for the new US exports, since China will become a big part of it.
Now, will Romney actually follow through with his bold trade proclamation? In accordance with the very nature of political success, Romney is a master of telling people – in this case Americans – what they want to hear. Of course Americans would love the assurance that not every manufacturing job will be outsourced to China, thus costing the US manufacturing industry jobs and money. But assuming he does follow through; will it make us better off?
Well, according to basic international economic theory, both countries are better off and have the potential to grow more if they specialize in their respective comparative advantages. Let’s say China has cheap less-skilled labor, and the US has high-skilled labor (to simplify), and we specialize in each. But this is assuming competitive markets and pure free trade! China, as we know, doesn't fall into this category. At the same time, import barriers could also hurt Americans by reducing American price competition among producers – thereby raising US prices – and alongside, the US would then be allocating resources to things that are not necessarily our comparative advantage. Yet, the current solution is technically costing the American manufacturing industry and particularly, workers – so that’s not optimal either. Thus, as with most political issues, the real question is preference. Do we want to hurt the US producers or consumers more in the long-term?

By: Nona Makaveeva

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