The Yuan vs. the Dollar

[Don Corleone]

Nobody can actually force them to properly value their currency. However, by keeping it artificially low, they make their goods appear cheaper on the world market. Example: calculators. Let's say a factory in the US manufactures calculators and charges $5.50 wholesale for them. A Chinese company makes the same calculator and charges $4.00. Obviously, the calculator vendor chooses the Chinese model. This means dollars start pouring into the Chinese economy. If they did nothing, it would make the value of the Yuan rise with respect to the dollar, so the next time you do the price comparison, maybe the Chinese calculator is (hasn't changed it's price in Yuan, but the Yuan is now worth more dollars) $5.00. Not as good a deal, but still preferable. Over time, the economic system will balance itself, economies that are large exporters see their currencies rise, and economies that are large importers see their currencies fall. This has the net effect of eradicating trade imbalances over time.

The Chinese government, wanting to keep dollars flowing into it's economy, has said "don't pay any attention to how much the calculator costs in China. Whatever the price is currently in the US, we will keep the same 50% discount". Now, this has the effect that their employees and materials vendors aren't actually accumulating wealth from the transactions. Why? Because since the dollar is devalued, and the Yuan is forcibly tied to the dollar, the Yuan is devalued as well. The calculator factory worker now needs to spend more Yuan to buy his weekly groceries. But if your goal is to siphon wealth off of another economy, not necessarily create it within your own, this is a sound strategy.

The US can't do anything about how China values the Yuan, directly. But what they can do is recognize the practice as giving Chinese manufacturers an unfair trading advantage and put sanctions on them accordingly (import tariffs are increased so the calculator vendor sees the true cost of both calculators). The Chinese went bananas when Snow (US Treasury secretary) suggested that was on the horizon, and without using the actual words, implied that they would consider any changes to our import duties an act of war.

Should be interesting to see how this one plays out... Will the US let China maintain an artificial siphon of wealth on it's economy, because they're afraid of the political rhetoric coming from Beijing, or will they attempt to take measures to correct the problem, and risk conflict. Hard to tell, as the Chinese tend to use blustery statements with things like this. They described the spy plane (from the Hainan Island incident back in 2001) as the lead plane in a vanguard of an ariel assault and they were prepared to defend the homeland to the last man (even though the incident took place in international airspace).