The Long View of China’s Currency

The New York Times takes a more in-depth look at what impact a change in China’s exchange rate would really have on the :

A big change in an exchange rate seems at first glance that it should have an immediate impact. Certainly, it has some impact. The 1980s trade deficit with Japan would have grown even more rapidly had the yen not risen.

But there are two main reasons that a stronger renminbi probably will not lead to a rapid hiring increase in the United States.

The first is that China and United States aren’t the only two countries in the world. Many products that we think of as being made in China, like the iPhone, are really just assembled in China. High-end parts often come from richer countries, like Israel or South Korea. Basic parts can be made in poorer countries, like Vietnam.

The entire value of the product counts toward the trade deficit between the United States and China. A stronger renminbi, however, would affect only the portion of the work done in China. And if the renminbi rose enough, some of this work would simply shift to a country like Vietnam (where per capita income is about $3,000, compared with $6,500 in China). Such a shift wouldn’t help close our overall trade deficit.

Chinese officials sometimes go so far as to suggest that the value of the renminbi makes little difference. That’s wrong. China’s economy is now large enough that its currency matters. But the issue is more complicated than it first seems.

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