Saving U.S. Manufacturers Not Just a Matter of Revaluing China’s Yuan

From the White House to the campaign trail, the weakness of China’s currency has been targeted as a chief cause of flagging U.S. competitiveness and job losses. Fix that, the argument goes, and you can save American manufacturers from going the way of the dinosaur.

At last weekend’s Group of 7 meeting in Dubai, U.S. Treasury Secretary John Snow convinced fellow financial czars that “more flexibility in exchange rates is desirable for major countries,” a thinly disguised prod to China, which has pegged its yuan at just less than 8.3 to the dollar since 1994. In visits to down-at-the-heels American factory towns, President Bush and some of his Democratic challengers have likewise blamed what they call unfair Chinese trade practices -- as well as its weak currency -- for the erosion of America’s manufacturing base.

The National Assn. of Manufacturers and the AFL-CIO, usually at odds on trade issues, may well join forces in filing a Section 301 petition under U.S. trade law, accusing China of holding down the value of the yuan in a bid to boost exports. Members of Congress also have proposed legislation that would impose tariffs on Chinese goods unless the yuan is revalued.

The way they see it, China’s competitive advantage is coming “largely from the undervalued currency,” said Frank Vargo, vice president of the manufacturers group.

But the effect of the yuan on the U.S. economy is far more complex than all the rhetoric makes it out to be. Although manufacturers in this country are struggling against low-cost imports, many U.S. firms, their shareholders and consumers are the beneficiaries of low-cost Chinese production.

What’s more, as one of the top purchasers of U.S. Treasury bonds, China also is helping to finance the federal budget deficit, which needs to attract $1.5 billion a day to keep its accounts in balance. If China pulled out of U.S. markets, Washington might be forced to raise interest rates. Fearful that such a move could stall the fragile U.S. economic recovery, markets reacted negatively last week to the U.S. push for a stronger yuan.

Meanwhile, critics accuse America’s leaders of scapegoating China to divert attention from the exploding budget deficit, rising health-care costs and other pressing domestic problems.

They point out that the yuan’s value is hardly the only factor at play in the shrinking manufacturing sector in the United States, which has lost a net 2.7 million factory jobs since July 2000. Many economists contend that globalization and the long-running migration of labor-intensive production to cheaper locales are the culprits.

The yuan “has become very politicized, and some people are using it as the main reason for the decline in U.S. manufacturing jobs,” said Morris Goldstein, an economist with the Institute for International Economics in Washington. “That is rubbish.”

Goldstein estimates that a 20% appreciation of the yuan, coupled with a smaller appreciation of the yen and other Asian currencies, would drive the value of the dollar down 5% by reducing the demand for dollar-based assets. He said that would shave $50 billion to $75 billion off the U.S. current-account deficit, which is running at about $575 billion.

“It would be helpful for China because it would be more likely they could maintain domestic stability, and it would be good for the U.S.,” Goldstein said of a yuan revaluation. “But it’s not a miracle pill.”

The debate over the yuan highlights the increasingly contentious division between U.S. companies that are domestically focused and those dependent on profits from overseas.

U.S. manufacturers with plants at home would benefit from a relatively weak dollar because their exports would be cheaper and imports would cost more. But companies such as Wal-Mart Stores Inc. and Kmart Corp., which buy billions of dollars in goods from China, would see costs rise.

In a sluggish global economy, many U.S.-based multinationals are concerned with keeping China’s economy growing, so its 1.3 billion people can buy U.S.-branded cell phones, shampoo and automobiles.

Analysts are quick to underscore the differences between present-day China and the Japan and Germany of earlier decades, which were targets of U.S. revaluation pressures. Because those countries had long-established industries with highly paid workers that competed directly against U.S. firms, currency appreciations provided immediate relief by making U.S. products more competitive.

China is different.

Its huge low-cost labor force provides the production platform for an increasingly integrated global economy. David O’Rear, chief economist at the Hong Kong General Chamber of Commerce, notes that about half of China’s exports -- whether Reebok International shoes or Gap Inc. shirts or Motorola Inc. cell phones -- are either produced by a non-Chinese company operating in that country or shipped to a foreign firm for sale abroad.

“That means if you shoot at China’s feet,” O’Rear said, “you’ve got a 50-50 chance of hitting your own.”

In addition, many Chinese exports, such as laptop computers, depend on parts imported from other countries. If the yuan appreciated, the competitive benefits for U.S. manufacturers could be muted because those raw materials would then be cheaper for the Chinese.

Then there’s the how-low-can-it-go factor: If China’s costs were to rise slightly and it didn’t send as many consumer products to the United States, “they’d be coming from Southeast Asia,” where costs are even cheaper, said Myron Brilliant, chief Asia strategist for the U.S. Chamber of Commerce.

Jack Wright, chief executive and president of Hyatt Die Cast & Engineering Corp. in Cypress, a manufacturer of fuel doors for Boeing Co. jets and parts for missiles, would welcome any relief from the intensifying Chinese competition. He said he recently lost an order for metal face plates for testing equipment because a Chinese firm underbid his by 70%, quoting a price below Hyatt’s production costs.

But Wright, whose firm has experienced a 50% drop in sales over the last three years, doesn’t think a currency revaluation alone will do the trick.

“There’s no such thing as fair competition with a country that pays its workers $40 a month,” said Wright, adding that the average worker in his 120-employee firm earns at least 80 times that much. He would like the U.S. government to impose tougher measures to protect U.S. manufacturers, such as steep tariffs on Chinese goods, or to implement “Buy America” programs.

Vincent Lo, chairman of Shui On Holdings, a Hong Kong real estate company that owns several cement plants in China, also thinks that the gains for American competitors from a yuan revaluation would be slim. He said aggressive Chinese firms would lower their costs, cut benefits or move to cheaper places such as Chongqing, which is home for 31 million people whose average wages are half the level of those in Shanghai.

“People have to face this reality: Manufacturing jobs are moving to China,” said Lo, who visited Los Angeles this week to promote investment in the Yangtze River basin.

Chinese companies are nervous about the prospect of a yuan revaluation. In a phone interview from the Qingdao headquarters of Chinese appliance manufacturer Haier, product manager Liu Wei said, “We worry about it because it would certainly impact our business.”

Faced with its own unemployment headaches, China has shown no inclination to give in to the growing pressure from the U.S. However, Beijing’s leadership appears to be mulling over various options to head off an election-year confrontation, according to analysts.

Those include increasing the bandwidth of the yuan-dollar peg, easing controls on the amount of money Chinese individuals can spend abroad or issuing dollar-denominated government bonds. Another short- term solution would be for Beijing to place an order for big-ticket U.S. goods, such as Boeing jets.

But analysts are virtually united in their belief that Beijing will not revalue or float the yuan in the near term because of fears that it would destabilize the country’s antiquated and heavily indebted banking system. “China won’t do anything soon,” said Andy Xie, a China economist with Morgan Stanley in Hong Kong. “It’s decisions are always based on stability.”

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Iritani reported from Los Angeles, Marshall from Hong Kong.