When President Hu Jintao of China visits Washington this week, many Americans will clamor for Beijing to stop manipulating its currency. We think we are being cheated on a huge scale, but we should reconsider. When it comes to lost jobs, the negative impact of China’s currency, the renminbi, is less than one might think. Adjusting the exchange rate should not take priority over more vexing issues like North Korea, Iran and bilateral trade.
Since China agreed to a more flexible exchange rate last summer, its currency has appreciated a measly 3.6 percent against the dollar. This is because China, just like the United States, is also worried about jobs. In going slowly on appreciation, China is giving its exporters time to adjust, thereby limiting job losses and containing social unrest.
Many Americans believe that the Chinese jobs being preserved by an artificially low currency come at the expense of American jobs. There are three common explanations behind this theory.
First, a stronger currency would increase the purchasing power of Chinese consumers and decrease the relative cost of American goods in China, spurring more Chinese to buy more American products. Second, a stronger currency increases the relative cost of Chinese goods in third markets, like Europe or Latin America. So if the renminbi appreciates, consumers in other countries will shy away from Chinese products in favor of American products. Third, a stronger currency would increase labor costs in China, making it less attractive for American companies to move jobs to China and thus keeping more people employed at home.
These claims, however, are more wishful thinking than actual truths. Consider the first idea, that a strengthened Chinese currency would increase the growth rate of American exports to China. From 2005 to 2008, the renminbi appreciated nearly 20 percent against the dollar. Yet, American exports to China over those three years grew at a slightly slower pace than in the previous three-year period when the renminbi did not appreciate at all (71 percent versus 89 percent).
This is because many of America’s top exports to China are for capital-intensive goods like aerospace and power-generation equipment. Price is but one of several factors for these purchases, along with technology, quality and service. In addition, American companies in those industries are usually competing against European and Japanese firms rather than Chinese manufacturers. Ultimately, the dollar-euro and dollar-yen exchange rates may play more important roles in Chinese demand for American goods than the renminbi rate.
Second, I recently did an analysis of the top American exports to our 20 leading foreign markets, and found little evidence that an undervalued Chinese currency hurts American exports to third countries. This is mostly because there is little head-to-head competition between America and China. In less than 15 percent of top export products — for example, network routers and solar panels — are American and Chinese corporations competing directly against one another. By and large, we are going after entirely different product markets; we market things like airplanes and pharmaceuticals while China sells electronics and textiles.
Finally, it is unlikely that a stronger renminbi would bring many jobs back home. Instead, companies would most likely shift labor-intensive production to Vietnam, Indonesia and other low-wage countries. And in any case many high-skilled jobs will continue to flow overseas, as long as cheaper talent can be found in India and elsewhere. Only in a few industries, like biomedical devices, would a stronger Chinese currency combined with quality issues tempt American companies to keep more manufacturing at home.
Don’t get me wrong: China’s currency policies have led to unhealthy artificial distortions in the Chinese and world economy. They also fuel currency wars that threaten to undermine the cooperation needed to sustain a global recovery. And while the effect on American workers is far less than imagined, workers in the developing world stand much to gain from a faster renminbi appreciation.
We should discuss currency issues with China, but the exchange rate should not be at the top of the bilateral agenda. The issue is best left to the Group of 20, for this is as much the rest of the world’s problem as it is ours. Resolving our economic troubles will depend much more on reinvesting in education, transportation and other government services, basic science and applied research than on forcing China to yield on its currency.
Mark Wu, an assistant professor at Harvard Law School.