Unintended consequences
| Tom Nightingale chief marketing officer, Con-way Inc. [email protected] |
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On Second Thought …
For several years, certain politicians have made it their mission to speak out against China and its practice of deliberately undervaluing the renminbi (RMB) ' a view many in the United States share with many other countries.
On Jan. 18, Chinese President Hu Jintao arrived in Washington for what is now his well-documented visit with President Obama, only to find that legislation had been unveiled that would allow the United States to take punitive action against China if it didn't allow its currency to appreciate.
Though it's unlikely, let us assume for a moment that China allowed the RMB to increase in value to avoid sanctions and, perhaps more detrimental, being labeled as a manipulator of its currency. Would an appreciated RMB close the gap on the large and growing bilateral trade deficit with China? We all know Newton's Third Law of Motion that for every action there is an equal and opposite reaction, so we have to ask ourselves how this scenario might really play out.
Supporters of the new legislation strongly believe that by undervaluing its currency China is taking away U.S. jobs and blocking the road to economic recovery. Alternatively, Daniel J. Ikenson, associate director of the Center for Trade Policy Studies at the Cato Institute, believes the administration and Congress need to take a moment to consider whether a change in RMB valuation would really deliver the trade balance that the United States wants. Ikenson believes that forcing China's hand on currency valuation would yield only short-term political benefits to some politicians. As it relates to the long term, if you consider the dynamics of supply and demand at a basic level, the downside of forcing the rapid rise of the RMB reveals itself quite quickly.
An increase in the RMB's value would enable U.S. manufacturers to better compete on price with Chinese manufacturers. They should see a bump in demand for U.S.-made goods relative to alternatives from China, which means that assembly lines at U.S. manufacturing plants should increase output, creating a similar ripple effect further up their U.S. supply chains. Additionally, U.S. companies would need to meet that demand by making more capital investments and increasing their labor force. All positive.
Where it gets tricky is that the U.S. consumer would be faced with higher prices on the products they consume, which is inflationary by nature. What's the effect of inflation on consumer demand? It suppresses it. With lower demand, manufacturing slows, which in turn slows the entire supply chain. Now we could be faced with job loss once again ' the very problem we would all like to resolve. So, the net effect on demand if the RMB is allowed to appreciate needs to be thought through and well-understood.
For the United States, the fact remains China is not only our strategic trading partner but also a competitive force. A number of U.S. companies have established operations in China because low manufacturing costs help them stock shelves with low-cost products that U.S. consumers demand.
Yes, increasing the value of the RMB would decrease China's exports and return jobs to the American people. But, that also means players in the U.S. transportation industry ' air freight, railway, trucking, and the businesses they touch ' would be affected by less freight arriving in our nation's ports or crossing our borders. Restored jobs in one sector could lead to fewer in another.
In a 2008 essay written by David Hale for Foreign Affairs, the economist and chair of Hale Advisors LLC, stated he believes that China isn't likely to acquiesce to pressure to revaluate its currency because the policy would mean 'fewer exports, lost jobs and capital flight to other emerging markets with cheaper labor costs.' His piece also reminds us that China could see exchange-rate losses on its hundreds of billions of dollars worth of U.S. Treasury debt.
Overall, appreciating its currency is a very scary proposition for the Chinese government and could lead to social instability ' clearly a driving force behind its unwillingness to appreciate the RMB, at least as rapidly as some in Washington would like them to. And, if the value of the RMB rises, China's investment in U.S. Treasury bonds would likely decrease, forcing U.S. interest rates up across the financial industry. This will result in decreased consumer spending and, thus, a downward spiral in the economy.
In the end, the issue of the bilateral trade deficit with China is far too complex to blame solely on the undervalued RMB.
Particularly given our industry, we should push our policymakers to take a methodical approach so that we're not surprised by unintended consequences. A focus on the long-term strength of the global market needs to remain intact. Short-term political action is not the way to get there.