Is the Battle for the Yuan Worth It?

The two economic giants are at it again. U.S. lawmakers have been trying to pass a bill to impose sanctions on China for its allegedly undervalued currency. In response, China has fired back, saying that the move violates World Trade Organization rules and is bad not just for U.S.-China relations, but also for the global economy.

I suppose now’s as good a time as any to ask this question: For all the conflict it has been causing, will the yuan’s appreciation even accomplish anything?

Supporters believe that revaluing the yuan higher will help rebalance the U.S’s trade with China and bring jobs back into the country. But truth be told, allowing the yuan to rise may not even have a big positive impact on the U.S. economy.

As far as trade is concerned, the dollar-yuan exchange rate is just one of many factors to consider. If you ask me, the U.S. will need to do more than revalue the yuan to get a significant positive impact on the U.S.-China trade deficit.

But you don’t have to take my word for it. Just take a look at what happened back in 1985 and you’ll see exactly what I mean.

Back then, the U.S. was in a situation not too different from what it’s going through now. It was dealing with a high dollar-yen exchange rate, and it wanted to combat the growing U.S.-Japan trade deficit. To do this, it came up with the Plaza Accord, an agreement with Germany, France, the U.K., and Japan that allowed the yen to rise in value against the dollar.

From 1985 to 1987, the yen appreciated by around 50% against the dollar. Such a big rally must’ve done something to cut the U.S.-Japan deficit, right? WRONG! While the U.S. reduced its deficit with other countries, it failed to cut its trade deficit with Japan, which was the Plaza Accord’s main objective!

Why in the heck didn’t it work out? A significant adjustment in the U.S.-Japan trade balance couldn’t take place because Japan had trade regulations that countered the effects of the yen’s appreciation. It had subsidies that aided Japanese exporters and regulations that worked against importers, leaving the U.S-Japan deficit largely untouched.

Is it worth all the trouble?

If you think about it, the current situation is very similar to that of 1985. China also provides tax rebates and subsidies for its exporters, and foreign access to the Chinese market is quite limited. These are issues that will not be addressed by a stronger yuan, though they contribute greatly to the U.S.-China trade imbalance. As such, we can’t rule out the possibility that the yuan’s appreciation will end up being a dud as well. After all, history does have a tendency to repeat itself!

As for bringing jobs back into the U.S., I don’t see the yuan’s appreciation having a big impact on U.S. employment, at least with regard to labor-intensive industries. Those jobs will likely end up in other low-wage countries like Bangladesh and Vietnam.

Most companies will probably take the same course of action as manufacturing giants Disney and Nike. When costs rose in China, they didn’t return to the U.S. They looked for inexpensive labor in other countries. This is why Nike now produces more of its products in Vietnam than in China. Check your own pair of Nike Dunks and see for yourself!

What the U.S. hopes to get out of revaluing the yuan is a slimmer U.S.-China trade deficit and more jobs for Americans. But with how things are going, what they’re likely to get is a fight. After all, China has never been one to back down from threats, and it has a history of retaliating.

Who’s to say that China won’t strike back by putting up more restrictions on the importation of U.S. goods? Some believe that China may even opt to dump its U.S. debt holdings, which could severely disrupt financial markets.

For the global economy’s sake, let’s hope that things don’t escalate into an all-out trade war. I’ve said it before, and I’ll say it again: The U.S. and China are better off working together, rather than against each other. Stop hating and start cooperating! We should all be working towards building bridges, not burning them, especially in times like these.