Reflections on a Wandering Life.....

Wednesday, June 23, 2010

The Great Currency Debate 

Currency. The issue keeps coming up. I have been reading comments on several sides of this controversy ever since I came to China. It has been debated several times on CCTV. The Wall Street Journal has, of course, addressed the issue many times in the six years I have been in this country. And the issue is discussed frequently in the China Daily.

Here is what it comes down to: When I first came to China, the currency was pegged. What that means is that the value of the Renminbi was arbitrarily set at about 8.2 yuan to the dollar. It was not allowed to fluctuate naturally. This was good for China, because it tends to promote stability, and because a cheap RMB made it easy for Americans to buy Chinese goods.

But many Americans complained about this. They said that if the RMB were allowed to float, it would soon rise to a level much higher than 8.2 yuan per dollar. In fact, the Chinese government did allow the dollar to float slightly beginning in 2005. But it was pegged again at the beginning of the economic crisis.

But let's say they were right. Let's say that China floated their currency, and it immediately rose in value to 4 RMB per dollar. What would have happen? Probably several things, but in the minds of many Americans, the most important result would be that Chinese goods would suddenly cost twice as much (in dollars) as they had before. People would be less likely to buy stuff made in China, and American manufacturers who hire high priced union workers would be able to compete with Chinese manufacturers who hire poor people from the countryside of China, and so all the manufacturing jobs that went to China would magically return to the United States.

What's wrong with this thinking? Or right with it? If the RMB moved upward suddenly, you could probably argue that jobs that have not left America might be more likely to stay there. For the most part, though, those jobs that have already moved to China would not come back to the United States. They would move to other countries in Asia. The reason for this is that those other countries are less developed and have not seen the kinds of wage increases that have taken place in China in the years of China's recent rapid development. Their manufactured goods would still be much cheaper than American made stuff for some time. But the larger problem is that, in fact, the RMB is not going to be allowed to float naturally. It is being allowed to float very slowly and slightly at a strictly controlled rate, and only because of strong pressure from the United States. This fluctuation is simply not enough to have the effect of moving jobs back to the United States. It will just mean that Chinese goods will be a little more expensive for Americans.

My frustration with this whole question comes from my observation of how the the same issue played out in America's relations with my home country (Japan) an economic generation ago. I was in college when I turned on the TV and watched American congressmen bashing a Toshiba radio with their sledge hammers. In some ways, the injustice was greater then, because it was a rage against Japanese products, which were competing because they were of excellent quality. The Japanese deserved to be winning This time it is not an expression of rage against Chinese products, but an anger about American products manufactured in China at much lower costs, taking jobs away from American factory workers. There are no shoes made in America anymore. I ordered a pair of shearling moccasins a few years ago from L. L. Bean. You can't buy anything like that in China, but they were, in fact, made here.

But both in the case of Japan and China, the real problem is that labor costs in America are just too high. This is America's problem. It is was not something Japan had any control over that time, and it is not something China can do anything about this time. This is my beef with the Americans. They expect China to raise the currency rate and send the poor factory workers in the Pearl River Delta back to the countryside just so that overpaid unskilled workers in America can make more money to put in the coffers of union fat cats. And what do the unions do with this money? In the last election, the AFL-CIO set aside a fund of $53 million to get Obama elected. Assuming a salary of 1200 RMB per month, that money would feed and clothe 25 thousand factory workers in China for a year. Fifty-three million dollars. This is why American factory workers are overpaid. So that the labor unions can put their man in the White House. And you can imagine Obama owes a huge debt to those unions.

But there is also the issue of productivity. I will certainly concede that there was a time in the United States when unions were necessary. Unions did a lot to improve working conditions for laborers. I remember sitting in a truck stop one time watching a movie about Jimmy Hoffa. One driver said, "You can say what you want about him, but every truck driver in America owes that man a debt of gratitude." I suppose he was partly right. Even non union workers' wages are influenced indirectly by what is gained by the unions. But they have gone too far. I had a friend once who went to work for a General Motors plant in Minnesota. He had been brought up to work hard, but the other workers felt threatened by his diligence. They began pestering him to slow down. He ignored them. Pretty soon the union boss came to him and ordered him to slow down, because he was making the other workers look bad. He ignored the union boss. He told me that it wasn't more than two or three weeks before his supervisor came to him, and said, "I'm sorry, but if you don't slow down, I'm going to have to let you go. The union is complaining about you, and we don't want labor problems."

Can you imagine a factory worker in South China being punished for excessive productivity? The labor unions have destroyed the auto industry in the United States, and instead of confronting this problem head on, The Americans want China to prop up the decrepit American labor system by adjusting currency rates at the expense of Chinese factory workers who are working to support their families. So far, China has stood firm against this pressure--something the Japanese were not able to do. Japan bowed to American pressure, and it flattened their economy. They have never recovered. China (so far) has been more independent. But recent indications are not encouraging. I had thought China was all through letting the Western powers tell them how to run their economy.

The Americans have been right about many things, but they are dead wrong about this one. And their position is fundamentally hypocritical. Hong Kong has pegged to the dollar for many years, and I have never heard a complaint. And several countries use the dollar as de facto currency. The country of El Salvador doesn't even have it's own coinage. The U.S. dollar is used exclusively. If that's not a peg, I don't know what is. So why all the fuss about China? Because China provides the competition that ought to motivate the Americans to fix their labor problems. But the unions will have none of it. And they are spending lots and lots of money to ensure that their voice predominates.

I do not suggest that the issue should not be debated. There may be other reasons for allowing the yuan to elevate a little. Haven't seen any that impress me yet, but I allow that possibility for the sake of argument. But China must make this decision, and it must be made in consideration of what is best for the working people of China, not in response to pressure from American politicians, whose election campaigns are financed by union war chests.

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