The Disadvantages of a Chinese Revaluation

The US trade deficit with China has become a lightning rod for discontent in the US Congress especially since the Chinese have responded so slowly to US requests/demands to revalue their currency. Indeed everyone seems to accept that the undervalued yuan is, at the least, responsible for our slow recovery and, at the most, is a major cause of the global imbalances that set off the economic crisis in the first place. The popular impression though, that the undervalued yuan has benefited China at the expense of the US and the rest of the world, is misguided. As with most public policy discussions it is common to hear only one side of the story. This post is meant to highlight the expected costs for the US of a Chinese revaluation; the part of the story that is not often told.


The exchange rate is simply a price, a terms of exchange between two countries currencies, and as with any other product, price changes in either direction will help some and hurt others. In particular, an undervalued currency makes Chinese goods cheaper for Americans. This is one reason for the high level of imports from China and it is what leads to lower priced clothing, and toys, and garden tools, and appliances, and tires and all sorts of other things. In many cases the less expensive products are those purchased by lower income families who shop at Walmart and Target etc. If China raises its currency value significantly, as is desired by the US government, then these products will surely become more expensive. Low income households will suffer a reduction in their real incomes because the prices of the goods they buy will increase.


Curiously, the hope for the revaluation is that Chinese goods will become more expensive, thereby allowing US companies to compete easier by raising their prices, expanding US production and creating more jobs. Indeed, the more the prices rise and the more poor households are hurt, the more jobs in the sector will be created. This is great for an unemployed worker since having a job and paying higher prices is probably better than no job and lower prices. However, for the 90% of workers who are already employed they will just face higher prices.


Further, there is a chance that both the price effect and the job effect will be small. If importers respond to the higher Chinese prices by shifting their imports from other countries like Vietnam and Malaysia, then the US prices may not rise as much and poor families will be hurt less. However, that will also mean fewer jobs created.


Secondly, the Chinese can maintain their fixed exchange rate at a rate considered too low only by buying dollars on the foreign exchange market. These acquired dollars have been lent back to the US mostly in the form of loans when they purchase Treasury bonds. If the Chinese revalue their currency then they will lend less money to the US government.


This would come at a time when the US is borrowing more and more to finance its stimulus programs and is running larger deficits than ever before. These deficits are there, it is said, to fuel demand and allow for the creation of more jobs. However, if a source of funds to finance this spending is reduced then the US will be hurt in several possible ways. First, we might respond to the reduced Chinese lending by reducing the deficit accordingly. That would reduce government demand, presumably, and would reduce the jobs created out of that spending. In this case, the change in the Chinese currency value might create some jobs in the import competing sector while reducing jobs arising out of government spending.


Alternatively, the US could maintain its government budget deficit and borrow the money from someone else. However, to acquire extra funds may require higher interest rates to make them attractive. That would cost US taxpayers more, if not now, then in the future.


The point of this post is that a Chinese revaluation is not obviously a good thing for the US, as it has been portrayed. Instead it would have both positive and negative effects for the American people. Furthermore, it is not at all clear that the positive effects would outweigh the negative effects.

Finished Ravelry account

It was quite a hassle to find the right spot to put my knitting needles in, but it worked out. As for the yarn…. it’s still incomplete. The problem is that my grandmother gifted me a load of yarn, but without labels. So I don’t know what it is and therefore I can’t categorize it. But other than that my account is complete.

If you have a heads up for a ravelry pattern (free is possible) that is amazing, please tell me. Especially if it’s amigurumi!

Helping in Haiti

International Medical Corps is a global, humanitarian, nonprofit organization, founded by volunteer doctors and nurses and dedicated to saving lives and relieving suffering through relief and development programs. Our emergency response team is in Haiti responding in force. There are still thousands of patients seeking treatment of which approximately 80% are in need of surgery and are running out of time - especially with the tremendous aftershocks still devastating this country. The team is treating crush injuries, trauma, substantial wound care, shock and other critical cases with the few available supplies - And they're in it for the long haul.