Lately I've been seeing currency issues everywhere. For starters, an interesting point from Adam Davidson's astute little essay in this week's New York Times Magazine:
"[Based on the trade deficit,] [e]very month, the United States is demanding a lot of renminbi and China is demanding few U.S. dollars. The natural result should be for the dollar to get weaker as the renminbi gets stronger. But China’s government prevents that adjustment by artificially increasing the demand for dollars, spending much of that $24 billion surplus on U.S. Treasury bonds. This sounds boring, but it effectively makes all Chinese exports somewhere around 25 percent cheaper and all U.S. imports to China, effectively, about 25 percent more expensive."
I find this quite interesting in light of a book I've been reading, Judith Stein's Pivotal Decade: How the United States Traded Factories in the Seventies. I am trying to do a close reading of this book, so my hours of laborious reading have only brought me up to page 42 so far. Nonetheless, I've taken away enough already to see these tremendous parallels between the current U.S.-China relationship and the U.S.'s post-war relations with Germany and Japan.
As Stein herself points out, "Because both countries' currencies were undervalued, like China's today, their exports were advantaged." (p.11). She explains that Japan held reserves in dollars, which actually strengthened the dollar, weakened other currencies, and thus advantaged Japanese and German exports. (p. 10-11). Stein makes the point (as I understand it) that during the 1950's and '60's, U.S. governments allowed this currency undervaluation and related trade surplus to continue (to the U.S.'s disadvantage) because successive administrations prioritized foreign policy concerns over U.S. domestic economic policy. The foreign policy concern was essentially to strengthen these countries weakened by the war so that they would not become so weak as to be a vulnerable target for Soviet takeover, and to generally maintain their alliances with the U.S. during the Cold War. This concern was easily allowed to trump domestic economic priorities because the U.S. economy was so strong during these decades. The imbalance began to appear to policy-makers (i.e., the Nixon administration) in the early 1970's. In 1971, certain Nixon advisers argued that "anemic growth, unemployment, and declining international power" in the United States were directly linked to the "expensive dollar and trade deficit" (p. 39), but the Nixon administration did not act to directly confront this problem. (At least not before page 41 of the book. I'll keep you posted.)
I find the historical parallels striking. It seems that people today speak constantly about the "threat" from China, as if this were an anomalous, unique occurrence. To review our own history and see that this is not new, but merely the most recent incarnation of an older set of circumstances provides a new way of looking at the current situation.
Just tonight I saw the play Chinglish, which explores the cultural confusions and linguistic misunderstandings that ensue when an American businessman travels to China in an attempt to do business. One exchange I found particularly interesting, and relevant here, was when a Chinese woman remarks to the American that, one day, China will become stronger than America. The American says, in disbelief (and thinking it may be a simple linguistic confusion) that China is already stronger than the U.S. This elicits a comment from the Chinese woman that a problem with the United States is that it acts weak even when it is strong. Could this be true?
I wonder if some of our fear is misplaced? The Chinese have not overtaken us (yet) in every manner. As is suggested by this fascinating series of New York Times articles (here and here), Chinese factories may have surpassed American manufacturing in technical, logistical, and labor force needs, but that is not the end of the story. In the U.S. and Europe, the industrial revolution was followed by a labor movement and other societal changes seeking a certain quality of life (or "work-life balance" in current speak) that China appears to be far from realizing. For example, the former NYT article recounts how, when Apple decided on a last-minute design change, it called its Chinese supplier, and "[a] foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day." This sort of labor force flexibility may prove attractive to U.S. businesses, but it does not make China "superior" to the U.S. U.S. society long ago made a sort of choice that we do not want to live in company dorms (or company towns, for that matter) where employees are always at the beck and call of the employer, and Americans did not want to be "roused" from sleep by their supervisors to begin the first in a succession of 12-hour shifts. With our current unemployment crisis, would some Americans make a different choice? I don't presume to know, I'll just observe that the reality, to me, does not appear that China has already overtaken us in every respect, but that China is now in an economic state resembling where the U.S. was a century ago.
Back to Adam Davidson's article. After remarking on the currency issues, he writes, "lower wages, lost jobs and crippled manufacturing employment fall on the less wealthy. The economists that I spoke to estimated that China’s currency policy has cost the U.S. between 200,000 and 3 million jobs. . . . U.S. manufacturing employment has fallen by around 6 million over the last decade. If China had allowed its currency to adjust naturally, life might be much better for many former American factory workers."
I am very intrigued by the connection between currency (under- and over-)valuations and the loss of manufacturing jobs. We often hear that manufacturing jobs have been lost because of lower wages in other countries, with a particular emphasis (as in the case of the auto industry) on the costs of the union wages, pensions, and other benefits. The New York Times articles make the interesting point that the factories themselves are superior in China. But this connection to currency valuation is so interesting to me, perhaps because it is the story that - no matter how true - many people seem to find too "boring" to bother discussing.
I am also intrigued by the sense of history repeating itself. I'll have to read on to see what happens beyond 1971, but I am fascinated by the sense of this being a continuation of an older historical trend, or a lesson we should have learned 40 years ago but did not. More on all of these themes yet to come.
Very insightful analysis. Keep it up.
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