A Devalued Renminbi Makes Wealthier Americans
Trade freely with the Chinese regardless of exchange rates
October 13, 2011
The U.S. government should not respond to China's allegedly undervalued renminbi by raising taxes on Americans who buy imports.
The lower the value of the renminbi the wealthier it makes Americans. Ultimately, the goal of trade is to import goods and services. Exports are a cost; they're the price paid for imports. By keeping the value of its currency low, Beijing enables Americans to stretch our dollars farther. This results in significant improvements in living standards.
University of Chicago economist Christian Broda explains, "In U.S. stores, prices of consumer goods have fallen the most in sectors where Chinese presence has increased the most." Prof. Broda also finds that the benefits of low-priced Chinese goods flow disproportionately to poor Americans, dampening the effects of income disparities. Low-priced consumer goods are good for Americans regardless of why the prices are low.
A higher-value renminbi (as opposed to threatened U.S. tariffs) won't necessarily achieve the hoped-for rise in the prices Americans pay for Chinese goods. Supply chains today are global, so many of the components that Chinese manufacturers use are imported into China from elsewhere. If the value of the renminbi rises, Chinese producers' costs of acquiring these components decrease. The resulting fall in Chinese production costs enables producers there to cut prices. Lower prices of Chinese finished products would offset, perhaps significantly, the higher prices Americans would pay even with a higher-valued renminbi.
History shows that governments, including Uncle Sam, routinely demonize foreigners in order to bestow unwarranted privileges on politically influential domestic producers. Claims from politicians and industry leaders that certain foreign countries practice "unfair" trade are politically convenient to make. Therefore, such claims should meet a heavy burden of proof before being accepted.
But it's not even clear that the renminbi is undervalued given that Beijing has a legitimate case for keeping the renminbi's value predictable by tying it to that of the world's reserve currency: the U.S. dollar.
Protectionism typically is sold to the public with dubious excuses and then, when imposed, it invariably harms the economy. Today's scuffle over the value of China's currency is simply the same old story.
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