With the yuan now set to appreciate, will US policymakers rue the day?

The Chinese have announced they will allow their currency off the leash. While not a floating policy quite yet, the yuan will edge up over time. Pegged to the dollar since July 2008, the yuan has remained at about 6.83 per dollar. Some economists have described the yuan as 20% undervalued (although when you search to source this, it’s mostly the IMF, politicians, and Paul Krugman that make this claim). This new found flexibility is a step toward what Washington policymakers have been pushing hard for. The conventional wisdom is that an undervalued yuan hurts US exports to China’s growing consumer base. Donald Trump made an interesting point regarding China, and I quote:

Hey look, I know lot’s of folks in China. They think we are the dumbest son of a bitches in the world. They think our representatives don’t know what they’re doing. They laugh at us behind our back. They’re taking money out (of the US economy) and then they loan it to us.

The Donald advocates a tariff on Chinese imports to raise revenue, decrease the trade deficit, and bring back manufacturing jobs to “places like North Carolina and Alabama”. China is not a free trade country. It is very hit and miss when it comes to American companies having success entering China’s marketplace. This would be an argument for Trump’s tariff. However, China still enjoys a steep absolute advantage in the manufacturing sector. In other words, they can produce more of a good at a lower absolute cost than America. Is this because their labor is inherently more efficient? No, but it is because they work longer, have fewer environmental and safety regulations, and don’t have the health care and pension costs of union-laden American counterparts.

The Chinese are expected to let the yuan rise 2-3%, and made the announcement right before the G20 meeting in Toronto this weekend where they were going to be on the hot seat. This move will minimize the scrutiny and perhaps even garner some praise in Canada. Will a 2-3% rise in the cost of Chinese goods really mean much to America in the way of job creation? It seems like a stretch to me. Your cheap Blu-Ray player from Wal-Mart will go from $89.99 to $92.69. I don’t see that bridging the gap between the real problem in US manufacturing, labor costs, and creating many jobs.

So it’s entirely possible that a higher yuan will create few jobs here (all of which would be very delayed) and in return we all pay more for Chinese goods. Sweet deal. More troubling is that China has kept the yuan pegged to the dollar by purchasing extraordinary amounts of US Treasuries, which finance the US government’s spending sprees. If the yuan ever truly floats, China won’t need to buy our debt in such great quantities. In order to spur demand for our debt we would have to raise interest rates on U.S. Treasuries. This would make it even more difficult to pay off the deficit and increase borrowing costs for credit-seeking Americans and businesses.

A burgeoning yuan on the global stage could eventually make the dollar lose value. This would jack up the price of imports from around the world, including oil.

So let’s all be careful of what we wish for when it comes to the yuan. And let it be known that Tim Geithner, in particular, has been pushing for this since he was the president of the New York Federal Reserve Bank.

Trump says the Chinese have been laughing at us behind our backs. Beyond the fact that’s exactly what it feels like everytime Geithner makes the sojourn East, let’s hope the joke’s not on America when it comes to the yuan.

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