United Interests

As the leaders of G20 assemble in Cannes for their sixth summit, the leader in most demand could be the Chinese president, seen by some as a white knight who can rescue the euro in distress. The US has a more cynical view, and in some circles, China's rising financial clout is viewed as more threat than promise. It may be sheer fluke, but even coincidental reminders of a US decline add to rising temperatures in US-Chinese relations: China’s GDP growth rate for the year’s third quarter was 9.1 percent, the same percentage as the US unemployment rate for July, August and September.

Such coincidences offer confirmation for those who view China’s growth as unfair and responsible for the US decline. The Obama administration openly suggests that China is manipulating the renminbi to boost Beijing’s exports. The US Senate approved the Currency Exchange Rate Oversight Reform Act, which is intended to leverage the exchange rate of Chinese currency with retaliatory tariffs. Although the bill is unlikely to win approval from the House of Representatives or become law, it nevertheless expresses growing American anger. President Barack Obama may have expressed reservations about the bill, but seems to accept the view that China manipulates currency exchange rates for its benefit. Before the 2008 presidential election, while trying to win the labor vote, Obama spoke of China’s manipulation to a US textile trade union.

Yet Obama also understands that even if such manipulation is true, the benefits are not one-sided. Low-priced commodities from China and elsewhere have long kept US inflation low, which helps stabilize the US economy and society. After all, American consumers made the choice to buy low-cost products that contributed to the relocation of manufacturing jobs.

The president must also weigh the interests of American investors. With the shifting winds and cost savings of globalization, it is hard to keep all US manufacturing operations at home. Given that China’s present per capita GDP is just 9 percent of that of the US, it is unreasonable to block American investment in China. Overall the US has benefited no less than China has from exchange rates, through economic engagement and cooperation.

True, Chinese prices of commodities have been inexpensive for decades. When China started reform in 1978/1979, its exchange rate was US$1=RMB 1.6 yuans. By the time the RMB started appreciating in 2005, the currency had declined to US$1=RMB 8.26 yuans. Simply put, over 26 years, from 1978/1979 to 2005, Chinese currency had devalued by more than 80 percent against the US dollar, while China’s economic output had increased ten times as much in real terms. It makes sense that China deprecated its currency because of its earlier overvaluing. However, too much drastic devaluing was driven by China’s desire to fuel its exports.

China’s success has followed those of Southeast Asian countries, which embraced foreign investment and stressed an export-orientated trade, lifting the national economy and competitiveness in a short period. Depreciating the RMB could both reflect its true market value and entice foreign investment. Over time the US overseas investment has mostly turned to China, mainly due to the labor cost measured by the US dollars. However, such an approach, including over-depreciation, would be unhelpful to China’s long-term economic prospects.

At per capita GDP of about $4,400, easily accumulating to China’s aggregated status as the world’s second largest economy, China is facing multiple quandaries: consequences of stressing exports while massively ignoring environmental protections; low salaries that have long curtailed domestic consumption, subjecting China to international opprobrium; and a favorable exchange rate for exports, suppressing China’s ability to import, which is undesirable for global trade and economic rebalancing.

From the mid-2000s, China started an incremental reform of its currency-exchange rates. Since then, the renminbi has appreciated by some 30 percent. With a short break since the global financial crisis of 2008, China has continued its process of currency appreciation, accompanied by the closing of some businesses. Still, China’s exports continue to expand while the government strives to increase imports. Chinese President Hu Jintao has just indicated that the country will significantly boost its imports in the next five years.

Lately China has faced a wave of wage increases nationwide. Rising inflation, a labor shortage, as well as heightened expectations have all contributed to this trend. However, the combination of such currency appreciation and salary increases in China won’t deliver more jobs to America. The soft strike in Foxconn in Shenzhen – a major manufacturer of Apple and other electronic products – last year raised the average monthly salary there to nearly $200, a 50 percent increase. Yet manufacturing of iPhones and iPads would at most shift from China’s coast to its hinterlands or other Asian economies – not to the United States, as the increased salary is still less than 10 percent of that in the States. Consequently, Apple would continue to outsource to areas with low-cost labor, as Americans and Europeans are attached to low-cost manufactured goods.

Whether China manipulates currency or not, the reality is there is little chance the US could have prevented its jobs flowing to emerging markets. This is a natural trend of economic globalization that the US started and benefited from, and cannot stop. A proper currency exchange rate is certainly fair, and even more important is balanced international trade, with fair distribution of wealth and opportunities among Americans. On this last point, the Occupy Wall Street movement suggests that internal US dissatisfaction has little to do with China.

Unchecked appreciation of China’s currency would potentially lead to Chinese jobs flowing to even lower-cost countries, not the US, and the US Congress needs to understand the limits of congressional pressure.

Fundamentally, the US should focus on balanced trade rather than meddling with a particular exchange-rate tool. The US is China’s leading trade partner, with China’s US exports topping $365 billion in 2010, and China already imports about $102 billion worth of goods and services annually from the US, according to Chinese government data. China has both the potential and obligation to boost its US imports, to protect a healthy bilateral trade relationship.

Appreciating currency is a medium- term objective, already underway, while in the short term, China needs to speed up its purchases especially as the US heads for the next presidential election.