May 22, 2007


Yuan Worries (Matthew J. Slaughter, 5/21/07, Wall Street Journal)

Fact 1: China runs a large and growing trade surplus with the United States. In 2006, the goods-trade surplus exceeded $232 billion. This was an increase from 2005 of $31 billion, an amount larger than the entire deficit just 12 years ago.

Fact 2: China focuses its monetary policy on fixing the exchange value of its currency, the yuan, relative to the U.S. dollar.

Many policymakers and pundits connect these two facts by asserting that an unfairly low value of the dollar-yuan peg is causing the massive bilateral trade imbalance. The 109th Congress introduced 27 pieces of anti-China trade legislation. The current Congress already has over a dozen such bills, many aiming to force an overhaul of China's exchange-rate regime. And late last week dozens of House members were poised to file a Section 301 petition, asking the U.S. Trade Representative to investigate undervaluation of the Chinese yuan.

These misgivings about the dollar-yuan peg are misplaced. Economic theory and data are very clear here on two critical points. Controlling a nominal exchange rate is a form of sovereign monetary policy. And monetary policy, in turn, has no long-run effect on real economic outcomes such as output and trade flows.

Take away the meaningless stuff and what would folks have left to obsess about?

Posted by Orrin Judd at May 22, 2007 6:28 AM

Just ask any of the critics if they ask for their money in yuans. These manufactured crises are getting more and more ridiculous.

Posted by: erp at May 22, 2007 7:37 AM

In 2006, the goods-trade surplus exceeded $232 billion.

In 2006, we imported about $290 billion worth of goods from China. (We exported about $58 billion in goods to China.) If we use a conservative 20% markup, which is roughly Wal-Mart's markup, US consumers spent $350 billion on goods from China last year. If the "China Price" is roughly 70% of the US price, buying the same goods from US manufacturers would have cost consumers $500 billion. Trade with China saved consumers $150 billion last year or approximately $500 per person.

Posted by: Ibid at May 22, 2007 9:39 AM

The problem is that a great deal of the Chinese products are worthless c**p.

I taught elementary school for couple of years after retiring from my real job. The school district supplied pencils made in China, presumably because these were a little cheaper.

Well, not really. For one thing, the leads were mostly off-center, which means that they could not be sharpened in a round-eye pencil sharpener. Even the rare ones which were properly made were almost useless, as the kids kept breaking off the points--the graphite beint too brittle.

So the effect on productivity was disasterous. We were out not only the cost of the pencils, which had to be replaced with American products, but much more importantly, classroom time was being wasted. I would expect that the same result obtained in any enterprse which attempted to use shoddy tools and materials to save money while wasting time.

Did I tell you about the poison dog food?

Now the guns. China makes a lot of guns. Their AK47 and SKS copies are pretty good--better than the Russian, although not so good as the Yugoslavian. In recent years, they have started to make reproductions of Western sporting guns. I recently exmined such a copy of the Browning semi-automatic .22 gallery rifle, offered at about a third of the cost of an original. My illuminated lens detected not not just the tool marks I has expected, but hand file marks, and on exterior parts. They were making guns as though Eli Whitney had never lived.

My point is that value is determined by more than price. What is the cost to the consumer of a can of poison dog food?

The folks over there are going to have to learn some things about quality control and it is going to take sophisticated market mechanisms to teach it to them. The way forward, I submit, is to have commercial law and tort law reach back through the chain of distribution and production to visit the results of shoddy merchandise upon its purveyors.

Posted by: Lou Gots at May 22, 2007 11:20 AM


I don't see that happening - in fact, I see a sea change about China.

With dead pets, contaminated food supply stories identifying origin from China, people will start buying elsewhere. Of course the Chinese will figure out how to put Made in India, Pakistan, Vietnam etc. on their goods before the market momentum gets them in trouble.

Posted by: KRS at May 22, 2007 2:34 PM