Home » Opinion » Chinese Views
Forcing yuan upward a lose-lose scenario
By Sun Lijian |
March 29, 2010, Monday
|
Print Edition
Print Edition
THE recent row over the yuan's exchange rate against US dollar has morphed into a confrontation between Chinese and American policy makers and economists alike.
At the height of a war of words, it is quite comforting to see a few cooler heads in both countries trying to inject a dose of restraint into this frenzied bickering. However, some renowned American economists are calling on the US government to play hardball with China if the latter refuses to let the yuan appreciate against the dollar.
Their tough talk about how to fight a "trade war" with China is even more venomous than some US Congressmen's bluster against China as a "currency manipulator." In my humble opinion, the main reason that these otherwise phlegmatic economists are earnestly fanning the flames in the yuan polemic is that they think the yuan's steep appreciation could lead to a rise in overall commodity prices in US market.
According to this logic, as Made-in-China products lose some appeal due to price increases in dollar terms, a higher domestic demand for US-made goods could shore up American manufacturers' sagging bottom lines and ease spiraling unemployment.
Besides, a stronger yuan means a weaker dollar, which would boost US exports to China. Meanwhile, a stronger yuan could also portend an exodus of US companies back to the States as their operational costs rise in China.
These arguments seem plausible.
But in an era of globalization, what possible good could come out of raising prices of exports by altering the exchange rate, a move that would definitely hurt the purchasing power of ordinary American households?
The yuan's appreciation could even cause Chinese products to be priced out of reach for many Chinese consumers, whose per capita income stands at a modest US$3,000, less than a tenth of the US average. With stock of unsold products, Chinese companies would have to cut employees' wages or lay off workers to survive, thereby leaving many to feel the pinch.
Contrary to the belief of some American pundits, a rising yuan won't make US products more accessible to Chinese consumers.
Of course, China could produce more high-end goods and sell them to an affluent domestic clientele to offset the impact of an appreciating yuan. Ideally, that would help reduce its reliance on major export markets like the US.
The question is, China as a manufacturing powerhouse has yet to acquire the same level of sophistication as the US. Both countries will stand to gain by leveraging their respective comparative advantage. For China it's cheap labor; for the US it's high technology. Any swap of the two countries' positions in the global value chain would result in misallocation of resources.
For a rapidly developing country with a vast pool of labor, it should surprise no one that China has run a huge trade surplus with the US.
This fact jibes neatly with the principle of foreign trade, which holds that trade imbalance is an effective form of global wealth distribution and a reflection of each country's comparative advantage. Any attempt to redress this imbalance by bullying the surplus country into submission or imposing trade sanctions will leave both countries worse off.
This "lose-lose" scenario is manifested in Japan's bubble economy during the early 1990s. After the country buckled under US pressure and signed the Plaza Accord in 1985, in which US dollar depreciated against Japanese yen and German Deutsche mark, soaring costs at home began to force Japanese manufacturers to move overseas.
To stimulate domestic consumption and undergird a massive industry transformation, the Japanese government enforced a moderate monetary policy. This proved ineffective.
Consumption remained sluggish as people were haunted by the fear of unemployment. They instead invested heavily in the capital market, inflating asset bubbles that would later burst and plunge the country into its deepest recession in history. Besides, a falling dollar did very little to narrow the US-Japan trade imbalance.
China can learn an important lesson from Japan's woes.
Precipitous appreciation of the yuan won't help the country's shift from a manufacturing-powered economy to a service-oriented economy. It will only be a recipe for financial turmoil.
(The author is executive vice dean of the School of Economics at Fudan University. The views are his own.)
At the height of a war of words, it is quite comforting to see a few cooler heads in both countries trying to inject a dose of restraint into this frenzied bickering. However, some renowned American economists are calling on the US government to play hardball with China if the latter refuses to let the yuan appreciate against the dollar.
Their tough talk about how to fight a "trade war" with China is even more venomous than some US Congressmen's bluster against China as a "currency manipulator." In my humble opinion, the main reason that these otherwise phlegmatic economists are earnestly fanning the flames in the yuan polemic is that they think the yuan's steep appreciation could lead to a rise in overall commodity prices in US market.
According to this logic, as Made-in-China products lose some appeal due to price increases in dollar terms, a higher domestic demand for US-made goods could shore up American manufacturers' sagging bottom lines and ease spiraling unemployment.
Besides, a stronger yuan means a weaker dollar, which would boost US exports to China. Meanwhile, a stronger yuan could also portend an exodus of US companies back to the States as their operational costs rise in China.
These arguments seem plausible.
But in an era of globalization, what possible good could come out of raising prices of exports by altering the exchange rate, a move that would definitely hurt the purchasing power of ordinary American households?
The yuan's appreciation could even cause Chinese products to be priced out of reach for many Chinese consumers, whose per capita income stands at a modest US$3,000, less than a tenth of the US average. With stock of unsold products, Chinese companies would have to cut employees' wages or lay off workers to survive, thereby leaving many to feel the pinch.
Contrary to the belief of some American pundits, a rising yuan won't make US products more accessible to Chinese consumers.
Of course, China could produce more high-end goods and sell them to an affluent domestic clientele to offset the impact of an appreciating yuan. Ideally, that would help reduce its reliance on major export markets like the US.
The question is, China as a manufacturing powerhouse has yet to acquire the same level of sophistication as the US. Both countries will stand to gain by leveraging their respective comparative advantage. For China it's cheap labor; for the US it's high technology. Any swap of the two countries' positions in the global value chain would result in misallocation of resources.
For a rapidly developing country with a vast pool of labor, it should surprise no one that China has run a huge trade surplus with the US.
This fact jibes neatly with the principle of foreign trade, which holds that trade imbalance is an effective form of global wealth distribution and a reflection of each country's comparative advantage. Any attempt to redress this imbalance by bullying the surplus country into submission or imposing trade sanctions will leave both countries worse off.
This "lose-lose" scenario is manifested in Japan's bubble economy during the early 1990s. After the country buckled under US pressure and signed the Plaza Accord in 1985, in which US dollar depreciated against Japanese yen and German Deutsche mark, soaring costs at home began to force Japanese manufacturers to move overseas.
To stimulate domestic consumption and undergird a massive industry transformation, the Japanese government enforced a moderate monetary policy. This proved ineffective.
Consumption remained sluggish as people were haunted by the fear of unemployment. They instead invested heavily in the capital market, inflating asset bubbles that would later burst and plunge the country into its deepest recession in history. Besides, a falling dollar did very little to narrow the US-Japan trade imbalance.
China can learn an important lesson from Japan's woes.
Precipitous appreciation of the yuan won't help the country's shift from a manufacturing-powered economy to a service-oriented economy. It will only be a recipe for financial turmoil.
(The author is executive vice dean of the School of Economics at Fudan University. The views are his own.)
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
