Friday, March 19, 2010

X-change Rate, Trade, and China

Ryan Avent continues to find new ways to lose the debate with Paul Krugman, making two questionable arguments -- first, that if China revalues its exchange rate, it would be "good" for China, and, secondly, that America should just let China have its way with us.

While a slight appreciation of the Renminbi might be positive for China, as it would reduce inflation and take off the international pressure, a large revaluation, or free float, would mean an end to "that giant sucking sound" which is the relocation of manufacturing to China would slow dramatically or stop, a relocation which speeds the development of China as an artificially high number of Chinese workers are pulled out of agriculture and get manufacturing experience at the cost of a low Renminbi. On the other hand, the large foreign currency reserves of the government mean that China won't have an Asian Financial crisis.

And, I'm at a complete loss for why economists such as Ryan Avent or Greg Mankiw think that tariffs are the worst thing in the world and should be fought at ever turn, but that an artificially undervalued exchange rate is A-OK. Thing is, both have roughly the same implications for trade.

1 comment:

  1. Mankiw's argument seems silly to me. His argument essentially boils down to that because many people are able to get cheaper goods from China that it's actually a good thing for us. Well, I'm sure the millions who won't have jobs aren't too excited about those cheap goods from China, not to mention the drag on GDP. Plus, if Mankiw is really so concerned about the economic well-being of the lower/middle class and their purchasing power maybe he should be arguing for middle class and lower class tax cuts, rather than continuing to defend massive tax cuts for the wealthy who can afford to pay for Chinese goods whether or not their currency is appropriately valued. I simply don't understand Ryan Avent's argument at all so I'm not even going to try to understand it.

    Also, the political discussion of this is dumb. We would never have to institute a tariff, as long as the threat was credible, or at least we wouldn't have to have a tariff for very long. Mankiw thinks some trade war is going to come out of every tariff, but China would have to be retarded to try to engage us in a trade war - the damage to their economy would be massive. So, I think even a serious threat of a tariff / surcharge / whatever would be enough to get them to re-value. The political concern, in reality, isn't about that. The political concern is that the U.S. wants China on board for sanctions with Iran; on dealing with North Korea; and on committing to fighting climate change. If we push them to hard on the yuan they are likely to do none of those things. That's what the real calculus should be about.