China Might Be Right About Currency

I do not say this much, but China is right, well in the short to midterm timeframe. China is right in saying that a quick currency revaluation between China and the United States of America will not alleviate the current trade imbalance between our countries. That is not because the revaluation will not have an effect; it is because the Chinese have more tools in their toolbox to use to keep their product prices at an artificially low level. To think that the Chinese government would not respond using other means would be naïve at best.

Do not misunderstand me, I still think that the Chinese will do everything that they can to prevent their currency from having a normal valuation, it is just that when it happens they will move the battle to another area. We are already seeing the Chinese push the envelope in other areas.

The Chinese have shown that they will do more than just illegal subsidies and no payback loans to keep their production costs down. They have even started to penalize foreign business to a much greater extent. It is common for the Chinese government to “force” the transfer of trade secrets to local companies before approving access to their markets. The government even “allowed” workers to strike, for higher wages, at foreign owned manufacturers. By doing this, foreign companies will then pressure their home countries to hold back in their efforts so the companies can try to gain market share. We know from experience that China has used these methods effectively. Fortunately, with the world economy in the midst of a shaky recovery we are seeing more resolve for both our administration and the world at large.

Everything is about perception. If businesses see that the United States of America and other major economies of the world are serious about China, business decisions will be affected. That is why it is imperative that we do not back down. By continuing the pressure on China to play fair, we are showing businesses that the artificial Chinese manufacturing advantage will disappear. With that artificial advantage going away, many companies will not see the ROI needed to justify the migration of manufacturing off shore. This will have the effect of reducing the manufacturing loss to China. It might even have an effect on re-shoring of manufacturing. Either, in any amount, is better for our economy in the long term. Unfortunately, it does not help us in the short term and might even have a negative effect.

In the long run, when China has no more “heavy weapons” in their assault of the world economy a more natural balance will occur. Unfortunately, that might still be decades away. The only real short, to mid, term improvement we can see will be due to a proactive change in domestic buying habits.