Category:[world] [Opinion] [Commentary]

Clutching at yuan revaluation like a magic bullet, the US continues to press China for a major appreciation of the renminbi to narrow the US trade deficit with China.

The renminbi was a focus of the second round of the China-US Strategic Economic Dialogue (SED) in Washington last month.

The day after the meeting, President George W. Bush said at a news conference that whether the renminbi would be allowed to appreciate was of great concern to the US.

After the first SED round last December, US Treasury Secretary Henry Paulson made the point that the core issue of the China-US Strategic Economic Dialogue was the RMB exchange rate.

On February 7, Paulson told the Senate Banking Committee that, because of the growing US trade deficit, the Bush Administration had exerted all efforts to urge the Chinese government to quicken its renminbi appreciation.

It has been standard practice for several US administrations to press its trading partners to increase the value of their currency to reduce the US trade deficit.

During the 1970s, the US forced the Deutsche mark to appreciate. The result was appreciation from 4.2 marks to one dollar in the 1960s to 1.5 marks against the dollar in the 1990s, a 64 percent increase. Similarly, the US put pressure on the Japanese yen in the 1980s. The yen jumped from 263 against the dollar in February 1985 to 128 yen against the dollar in February 1988, up 51 percent.

Despite these major moves, the US trade deficits with Germany and Japan have continued to grow. In 2000, the US trade deficit reached $29.5 billion with Germany and $81.3 billion with Japan. In 2006, the U.S trade deficit increased to $47.8 billion with Germany and $88.5 billion with Japan.

The euro is another case in point. By the end of January 2002, one euro was equivalent to $0.86 and on January 1, 2006 it was equivalent to $1.29, an increase of 50 percent. Despite this, the US trade deficit with the euro zone rose sharply from $54.0 billion in 2001 to $91.5 billion in 2005, up 70 percent.

The competitiveness of a country's or region's trade is determined by many factors, not just currency exchange rates. It is a traditional and narrow-minded international trade philosophy to rely on the pressure of currency appreciation alone to reduce a nation's trade deficit.

As the world has developed and international trade has become increasingly complex, a traditional trade philosophy must be updated.

According to US statistics, by the end of 2006 the renminbi had appreciated by 5.68 percent since the peg to US dollar was dropped in 2005. But the US trade deficit in the first quarter of 2007 reached $56.9 billion, an increase of 35.8 percent over the $41.9 billion deficit in the first quarter of 2005. What this means is that the appreciation of the renminbi has no effect on reducing the US trade deficit with China.

As a matter of fact, China's low labor cost - of both blue collar and white collar workers - and industrial centralization as well as mass production are the key factors behind the competitiveness of China's labor-intensive products.

As measured by the office of the US Trade Representative, the hourly wage of a Chinese industrial worker was $0.77 in 2006 while that of a US industrial worker was $18 to $20, more than 20 times greater. At what level can the appreciation of the renminbi make up for such a big difference?

In December 2006, the appreciation of the renminbi raised the price of China-made textiles and apparel sold for the US Christmas market by 5 percent. The price of toys rose by about 10 percent.

Most of China's exports to the US are basic consumer goods needed by the majority of Americans. The rapid appreciation of the renminbi will raise prices of these basic goods, increasing Americans' cost of living.

In his article "The Value of the Dollar", Ronald McKinnon, an economist at Stanford University, points out that a large depreciation of the US dollar against the renminbi could not remedy the savings imbalance between the US and China. Instead it could lead to a tide of unstable currencies resulting in deflation in China.

If the renminbi appreciates against the US dollar, and other Asian and even European currencies also appreciate against the US dollar, then inflation will return to the US, just as in the 1970s.

Professor McKinnon warned: "Unfortunately, due to constant pressures on China to appreciate renminbi against the US dollar, Paulson has departed from his alleged position of a strong US dollar. If China fails to withstand the pressure and greatly appreciates renminbi, it will then fall into the dilemma of deflation just like Japan in the 1980s and 1990s but its trade surplus will not shrink because of this."

Professor McKinnon's message is clear that the US is hurting China without getting any benefits through renminbi appreciation.

Economist C. Fred Bergsten said in January: "An increase of at least 20 percent in the average value of the renminbi against all other currencies will be required to achieve an orderly correction of the global imbalances."

According to IMF statistics, by September 2006, of the aggregate foreign exchange reserves of all the countries, the US dollar accounted for 65.6 percent, the euro for 25.5 percent, and less than 10 percent of the rest was shared by the pound sterling, the Japanese yen, the Swiss franc and other currencies.

With the knowledge of the weight of China's economy in the world as well as the position of the renminbi in international finance, the sentiment is growing that the US, the EU and Japan should take the major responsibility in tackling the issue of world economic imbalance.

How much effect can the pressure of renminbi appreciation have?

The import of large amounts of cheap, good quality daily consumer goods satisfies the needs of the US market, benefits its consumers and eases US inflation. It is the necessary complement to the US industrial restructuring and economic development. The trade deficit is a trade act and should be analyzed from the perspective of the market needs.

It is well known that at the Guangzhou Import & Export Commodity Fair, the most active buyers are the US importers. Wal-Mart imports from China multibillion dollars worth of consumer goods. In China-US business transactions, China has taken its advantage of low cost labor, resources, transportation and management while the US advantage in high technology is strictly dampened.

For many years, the US has done more importing than exporting in its trade with China, causing the trade imbalance. Therefore, deregulating the control of technology export is the shortcut to reduce China's trade surplus with the US.

For more than half a century, US labor-intensive industry has mostly shifted overseas. Take the shoe industry for example. In 1976, in the US market 53 pairs of shoes per 100 pairs were domestically made. That figure dropped to 22 pairs in 1986; 11 pairs in 1996; and only only one and half pairs per 100 were domestically made in 2006.

Now, 98.5 percent of the shoes worn by Americans are imported. In 2005, the US imported 1.8 billion pairs of various kinds of shoes from China. The average American wore six pairs of shoes made in China.

Even if renminbi appreciation substantially reduces shoe imports from China, the US will have to import from other countries like Vietnam and Indonesia, since many Americans cannot afford the shoes made in the US.

The appreciation of the renminbi can only reduce the US imports from China. It cannot prevent US imports from other countries. As a result, it cannot fundamentally reduce the total US trade deficit. Result: the US will be hurting others without getting any benefits for itself.

Wang Lijun is associate professor at Capital University of Economics and Business and Zhou Shijian is an executive councillor at China Association of American Studies

(China Daily 06/05/2007 page11)

Forcing fast RMB rise will be lose-lose situation(Over)
[Click Here]  Sharing with your friend in QQ/MSN!
Last:It's cancer - don't confuse it with sainthood