Amidst revived threats of a 27.5 percent tariff bill against Chinese goods in the U.S. Senate, President Bush’s former chief economic adviser Lawrence Lindsey offered up a yuan compromise in a Wall Street Journal op-ed. To Lindsey’s way of thinking, “Chinese authorities and not the market” are what fix the yuan’s exchange rate against the dollar, and as a result, it is “the Chinese government that implicitly decides who in America benefits from our trade relationship.”
To begin, just as Chinese authorities fix the yuan’s value, so too do U.S. authorities fix the dollar’s value. As the Journal’s George Melloan noted in a recent editorial, “no currency actually ‘floats.’” As opposed to commodities set by market forces, currencies today are merely paper concepts controlled by central banks through the creation of and extinguishment of that paper.
That the above is true calls into question Lindsey’s assertion that the “Chinese clearly undervalue their exchange rate.” More realistically, the Chinese likely recognize that the yuan’s credibility will be best maintained if its value is mostly fixed against the world’s senior currency, the U.S. dollar. David Ranson and Arthur Laffer are but two economists who have said that absent the yuan’s tight relationship with the dollar, market forces would arguably drive the value of the former down.
Regarding the exchange of goods between the two countries, Lindsey argues that the supposedly undervalued yuan creates “losers,” specifically the “American producers of goods that are now made in China.” Implicit here is the flawed assumption that changes in currency values impact the real price of anything.
In truth, as 18th century philosopher David Hume wrote, “the greater or less plenty of money is of no consequence” in trade since the price of commodities always adjusts to any changes in a currency’s value. Nixon Treasury Secretary John Connally articulated the same in pointing out that money itself “cannot produce, increase efficiency, or open markets abroad.”
If China adheres to Lindsey’s compromise and revalues the yuan upward, the imported commodity inputs used to create the goods they sell us would simply become cheaper in nominal terms. Conversely, U.S. producers would hardly gain from a devaluation of the dollar given the same market forces that apply to the Chinese in what is a world economy. Chicago-based Boeing is presently taking orders for its upcoming 787 Dreamliner. Its newest plane will be produced in six different countries. Rather than make its exports more competitive, a dollar devaluation would simply drive up Boeing’s nominal production costs in the U.S. and around the world.
While Lindsey acknowledged that U.S. consumers are today the “winners” due to the influx of low-priced Chinese goods, his analysis of winners and losers in the trade debate suggests the existence of political borders in a world economy that is rapidly removing them. Rather than bemoan U.S. consumer purchases of “tee shirts, shoes and appliances” from China, Lindsey should instead be celebrating the inclusion of hundreds of millions of workers into the worldwide labor pool.
Since the new arrivals to the global workforce are manufacturing goods not in our economic interest to produce, the U.S. labor force can engage in higher-value economic pursuits. The April 17 Forbes ranked companies around the world in many areas, including market value. Seven of the top ten most valuable companies are U.S.-based, including Microsoft, GE, and Wal-Mart. We let others make that which we won’t produce, and because we do, we have time to create the most valuable companies in the world.
Lindsey also argued that in “resisting revaluation, [Chinese president Hu Jintao] is making China poorer.” More realistically, Mr. Hu is intimately aware of what happened to Japan the last time the U.S. political elite engaged in one of its periodic protectionist episodes. The “revaluation” we forced on Japan through the 1985 Plaza Accord caused it to sink into a 15-year deflation from which it is only now in recovery. Lindsey lauded the fact that China “has quietly joined the U.S. as a superpower whose efforts are essential to maintain global peace and security.” It should be asked how peaceful China would be if a U.S. enforced currency revaluation drove it into a deflationary recession.
Returning to David Hume on money, he noted that it “is none of the wheels of trade: It is the oil which renders the motion of the wheels more smooth and easy.” Since China linked the yuan to the dollar in 1994, U.S. exports to China have risen 350 percent. During the same timeframe, total wealth-enhancing trade between the two countries has risen over 460 percent to $285 billion. Rather than engage in wealth-reducing currency revaluations, the U.S. and China should seek a tight link between the two in order to ensure the kind of stability that will cause our trading relationship to continue to grow.
–John Tamny is a writer in Washington, D.C. He can be contacted at jtamny@yahoo.com.