A ‘Floating’ Chinese Currency Is No Life Raft for U.S. Jobs
Current efforts by American politicians, business interests and unions to pressure China to increase the value of its currency, the yuan, to counteract the burgeoning U.S. trade deficit will not work. The yuan is not the primary cause of China’s export competitiveness, and the Chinese government cannot run the domestic economic and political risks that a currency revaluation would bring.
In January, the U.S. trade deficit reached a record level: Imports of goods and services outpaced exports by $43.1 billion. The weakness of U.S. exports underscores the painful loss of manufacturing jobs here in recent years and has impelled political, business and union leaders to look for someone to blame. In the roundup of the usual suspects, China, which accounted for $11.5 billion of the January deficit and is now embroiled in a trade dispute over computer chip manufacturing, is at the top of everyone’s list. Critics cry that cheap Chinese exports, both here and in foreign markets, are stealing U.S. jobs. They further charge that China is cheating by keeping its currency at an artificially low value against the dollar, effectively depressing the price of its exports in the U.S. The Bush administration and Congress have taken up the call to increase the value of the yuan as a means of solving U.S. export and unemployment problems.
But it is not certain that the value of the yuan has much effect on U.S. deficits. Economists do not agree on the issue. Last fall, when the yuan controversy was heating up, analysts at the International Monetary Fund contended that the yuan-to-dollar exchange rate was not unfairly skewed in China’s favor. Conversely, experts at the Institute for International Economics, a nonpartisan think tank in Washington, claimed that the yuan’s dollar value could be about 20% too low, but they pointed out that even if China revalued by this amount -- a virtually impossible outcome -- it would have only a modest effect on the U.S. trade imbalance. Cheap labor costs and other domestic policies play a greater role in China’s competitive trade advantage.
Politicians have no ear for such complexities. On March 3, four U.S. senators -- Charles E. Schumer (D-N.Y.), Richard Durbin (D-Ill.), Bob Graham (D-Fla.) and George Voinovich (R-Ohio) -- sent a letter to President Bush calling for an “emergency meeting” to “discuss concrete action regarding the continuing illegal undervaluation of China’s currency.” Although the White House does not contend that China is acting illegally, it generally agrees with this interpretation. Official U.S. policy calls for China to abandon its fixed exchange rate of about 8.28 yuan per dollar and let world currency markets determine its worth, a move that probably would result in revaluation. Only Federal Reserve Chairman Alan Greenspan, among major Washington officials, is willing to publicly state that a big rise in the yuan’s value could destabilize China’s economy and drag down global economic growth.
Greenspan’s caution is well founded. Although China may appear to be an economic powerhouse, with soaring exports and a gross domestic product growth rate of 9.1% in 2003, its underlying weaknesses could produce national calamity.
The most obvious problem is unemployment. Official statistics drastically underestimate the problem, reporting only 4.3% joblessness in 2003. The Chinese Academy of Social Sciences gets closer to the truth with its estimate of 12% urban unemployment. But a recent Rand Corp. report paints a much bleaker picture, calculating a total unemployment rate of about 23% nationwide in 1999, the most recent year for which the best information is available. For anyone who has walked through Chinese cities in the late winter just after Chinese New Year, when millions of idle young men pour in from the countryside in search of work, Rand’s numbers ring true.
Unemployment has its silver lining, keeping wages low and export prices cheap, but it is a dark cloud indeed. With so many people out of work and the prospects for finding good jobs so bleak, social unrest is a constant threat. Protests and demonstrations by the unemployed and disaffected are commonplace. The most recent incident to make the international wires occurred in February, when about 1,200 workers at the Tieshu Textile Factory in Suizhou, Hubei province, clashed with police while protesting unpaid benefits and managerial corruption. In the last year, demonstrations with as many as 10,000 people have taken place at other locations.
With such a daunting domestic labor outlook, Chinese leaders stress stability above all else in their economic planning. There is much they cannot control as their national economy opens wider and wider to global finance and production. The yuan exchange rate is one thing they can manage, and they have steadfastly resisted pressure from the United States and the G7 industrialized countries to let their currency float. They worry that a steep rise in the yuan could disrupt Chinese exports, weaken even further the employment situation and, perhaps, be the single spark that ignites a prairie fire of social unrest. If they were to compromise at all, they would accede only to a token increase in the yuan, maybe 5%, a move that would have no real effect on U.S. trade deficits or, President Hu Jintao hopes, on Chinese employment prospects.
Inflation is another worry for Chinese leaders. They have not had to care about it in recent years, but the memory of massive 1989 protests, which were preceded by a burst of inflation in 1988, is still in the minds of Beijing bureaucrats. In recent months, prices have begun to rise: 1.9% in November; 3% in December; 3.5% in January. The fast-growing Chinese economy has become increasingly dependent on imported oil to help keep up with escalating energy consumption (electricity use alone grew by 15% in 2003). An increase in the value of the yuan would push up prices of irreplaceable imports, energy included, driving general inflation higher. Before they know it, 1988 could be upon them again.
Fears of inflation and unemployment will most probably keep the Chinese leadership from taking any significant steps to revalue the yuan. But these kinds of issues are symptomatic of a larger political danger. The Chinese Communist Party’s highest priority is to keep itself in power. In the absence of popular elections, its legitimacy is derived mainly from claims that it can deliver the goods of economic growth and prosperity to the Chinese people. It has generally succeeded in doing this in the post-Mao era. But if economic conditions falter, as they did in 1988-89, the Communists know they could face serious political problems. They will not risk their political hegemony to assuage U.S. government officials and business interests. They will not let the yuan float and possibly increase significantly in value.
