The Irrelevance of Yuan Revaluation

Good article in today's Wall Street Journal by WSJ Asia editor Joseph Sternberg, sub-titled "You're not going to change the balance of China trade by adding 25 cents to the cost of a T-shirt."

To some in Washington these days, adjusting the yuan-dollar exchange rate is the fix for all America's ills. That single number supposedly determines which jobs stay in the United States and which go to China. It dictates which and how many goods move where. It's attributed the mystical power to raise or destroy mighty economies by its movements or lack thereof. Except that the real world doesn't work that way.

Mr. Sternberg then explains why the "revaluationists" have it wrong when they assume that the bulk of the value of imported Chinese products is exposed to the value of the yuan, when in reality only a portion of imports from China are exposed to exchange rates:

Take a $10 pair of boy's summer shorts: $2.50 is cotton, the price of which won't change with a revaluation because it's a globally traded commodity priced in dollars. Another $2.50 (perhaps) is profit. That leaves roughly $5 in Chinese labor and other yuan costs that are affected by a revaluation. Subject that portion to the 5% revaluation (that's at the upper range of current expectations for what Beijing will do) and the shorts now cost . . . $10.25.

And that $0.25 increase from an appreciation (depreciation) of the yuan (dollar) won't have any meaningful effect on the balance of trade like the revaluationists would have us believe. There's also the important issue of shifting production to other countries, which also weakens the revaluationists' case:

When China becomes too expensive, manufacturing moves elsewhere in Asia—not back to America. Rising labor costs, higher taxes on foreign businesses and the like have already pushed ultra-low-price T-shirts and jeans to the likes of Vietnam or Bangladesh. What remains in China are higher-value-added, more profitable name-brand products.

So according to the arguments made here, a revaluation of the yuan won't change anything meaningful, and certainly won't affect jobs in the U.S. And as I have argued before, to the extent that an artificially overvalued dollar (undervalued yuan) has any effect at all, the overall effect is positive for the millions of U.S. consumers and thousands of American businesses that purchase products imported from China.