Wishful American thinking about faltering chinese competitiveness
But the most convincing evidence actually indicates that stemming the Chinese import tide will require even broader measures. For the above economic developments have barely budged the manufacturing competitiveness numbers that matter most to China’s export-dependent economy and its domestic U.S. rivals — the prices of Chinese-made goods in the U.S. market. In other words, currency undervaluation obviously isn’t Beijing’s only means of artificially underselling its American industrial competitors, and Washington needs to target its other market-rigging practices as well.
Especially striking is the contrast between the prices of Chinese manufactures in the U.S. market and its currency’s recent appreciation. After years of freezing the exchange value of the yuan at about 8.28 per dollar, Beijing loosened this peg beginning on July 21, 2005. Over the next three years, the yuan gained 17.39 percent in value against the greenback in nominal terms. Yet during this period, the prices of Chinese goods sold in America rose by only 5.18 percent.
In July, 2008, as the global financial crisis was peaking and China’s export markets began shrinking, Beijing re-established the peg. For the next two years, the yuan barely budged against the dollar, and Chinese import prices actually fell by more than three percent. On June 21, 2010, with U.S. and global growth apparently recovering, China loosened its currency controls once more. From then until last month, the yuan strengthened by just over six percent versus the dollar. Yet the increase in Chinese prices during this stretch – 3.99 percent – lagged the currency’s movement again. The gap has closed so far in 2011, but only modestly.
All told, from China’s initial mid-2005 suspension of the currency peg through this September, the yuan appreciated by 22.3 percent versus the dollar. Yet during these years — a period when Chinese wages and overall domestic prices reportedly jumped as well — Chinese goods bought by U.S. households, businesses, and governments at all levels became only 5.89 percent more expensive.
The relationship between China’s exchange rate and the prices of its products in the United States is both strange in its own right, and markedly different from the exchange rate-import price relationship for America’s other trade competitors.
While the dollar was falling more than 17 percent against the yuan when the currency peg was loosened between 2005 and 2008, it also lost 14.58 percent against the broadest weighted index of currencies of its trade competitors. Yet whereas Chinese manufactured products became only some five percent more expensive in the U.S. market during this period, the prices of imported manufactures overall in the United States increased by 15.90 percent – more than three times faster.
Similarly, from the second loosening of China’s currency peg — in June, 2010 – through this September, the dollar weakened by roughly six percent against both the yuan and that broad foreign currency index. But Chinese import prices fell considerably less (3.99 percent) than overall manufacturing import prices (7.81 percent). The same results, moreover, can be seen so far this year, and for the post-2005 period.
Two main factors explain the discrepancy between surging Chinese currency values and domestic prices on the one hand, and stable prices for America’s Chinese imports on the other. First, Chinese government subsidies for investment capital, land, energy, water, other key industrial inputs, and the act of exporting itself can all reduce the costs and therefore the final prices of Chinese-made products even if wages, the exchange rate, and other costs rise.
Second, Chinese manufacturing productivity rates are rising – by double-digits annually, according to many estimates. And a key benefit of better productivity is the ability to enable businesses to reduce selling prices even as other factors of production, like labor, become more expensive.
Some of this productivity growth reflects genuinely improving efficiency by China-based manufacturers. Some also reflects China’s rapid shift into making and exporting goods in capital- and technology-intensive industries – which generally boast higher productivity levels than China’s long-time labor-intensive industrial staples.
But Chinese productivity improvements also reflect the success of predatory Chinese government practices aimed at securing technology by hook or by crook. Just a few examples: the encouragement of intellectual property theft from foreign firms; the extortion of industrial know-how technology from these companies by linking technology transfers to their access to Chinese customers; and the myriad subsidies aimed at luring advanced manufacturing to China regardless of market forces.
The lessons for American policymakers couldn’t be clearer. Reports of China’s manufacturing demise are at best greatly exaggerated. And China’s continuing industrial prowess owes largely to mercantile policies so numerous as to be systemic. Therefore, important as the currency manipulation bill remains, U.S. manufacturing and broader economic losses will continue until U.S. responses become systemic, too.
Alan Tonelson, is a Research Fellow at the U.S. Business and Industry Council, a national business organization representing nearly 2,000 small and medium-sized domestic manufacturers. The author of “The Race to the Bottom” (Westview Press, 2002), he is a regular contributor to the Council’s AmericanEconomicAlert.org website.
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