As Treasury Secretary Timothy F. Geithner and Chinese leaders waltzed delicately around the subject of the low valuation of the Chinese yuan at talks in Beijing Monday, a number of things became clear. First, China isn't going to increase the value of its currency sharply, despite demands from the U.S. Congress to let the yuan float upwards and allow the market to set its exchange rate against the U.S. dollar.
More importantly, even if China does increase the value of the yuan marginally, it won't bring back all those American manufacturing jobs that have been offshored to China over the past decade and a half.
Low-Cost Labor Advantage
"China right now has a labor cost advantage," says Mark J. Perry, a visiting economist at the American Enterprise Institute in Washington, D.C. "Revaluation would make them less competitive. What then might happen is things like clothing and manufacturing would shift outside China over into other, newer low-cost countries like Vietnam, India and Bangladesh, not back to the U.S. I don't think we can expect manufacturing jobs to come back to the United States. That's just unrealistic."
The yuan has been fixed against the dollar since the summer of 2008. A number of leading economists maintain that this level grossly undervalues the Chinese currency and gives it an unfair advantage in exports. C. Fred Bergsten, a distinguished scholar at the Washington, D.C.-based Petersen International Institute of Economics, argues that the yuan is undervalued about 25% on a trade-weighted basis and 40% against the dollar.
Bergsten maintains that if the yuan were to appreciate by 25% to 40%, this would reduce the U.S. current account deficit, a measure of trade plus financial flows, by $100 billion to $150 billion and create 600,000 to 1.2 million U.S. jobs.
Change Comes Slowly -- If At All
That kind of dramatic currency change is just not going to happen. In Beijing on Monday, President Hu Jintao opened two days of talks with the Obama administration by repeating his country's past position that the exchange rate of the yuan, which is also called the renminbi, will be changed only slowly.
"China will continue to steadily push forward reform of the renminbi exchange rate formation mechanism in an self initiated, controllable and gradual manner," he said. In other words: No change.
Geithner was surprisingly upbeat considering that his gentle pressure to revalue the yuan had been more or less rebuffed.
"We welcome the fact that China's leaders have recognized that reform of the exchange rate is an important part of their broader reform agenda," Geithner said. "Allowing the exchange rate to reflect market forces is important not just to give China the flexibility to sustain economic growth with low inflation, but also to reinforce incentives for China's private sector to shift resources to more productive, higher value-added activities."
Bad for Manufacturers = Good for Consumers?
Perry and a number of other economists maintain that the fact that China undervalues the yuan against the dollar is really a huge benefit to the U.S. "It's like giving us a discount on their products," Perry says. "There is some loss to American manufacturers, but it's a huge gain to American consumers and American companies that are buying inputs from China."
He points out that while we often think of Chinese exports largely as such things as cheap toys and clothes, the fact is that more than half of imports are used by American manufacturers to make finished goods that are then re-exported to the world.
Perry also points out that it is Chinese labor costs, not the exchange rate, that make China so attractive to American manufacturers. The average daily wage of U.S. workers is $135 when all benefits are counted, which is the average monthly income of Chinese workers.
"It's the low-cost labor in relation to their productivity that is attractive to American companies," Perry says. "Even if there was a 5% or 10% adjustment, which is all we could expect to get out of renegotiating their currency rates, that wouldn't be enough to really have any meaningful effect on trade flows. It would still be a bargain to U.S. consumers and U.S. buyers."