A stronger yuan may hurt US exporters, consumers

Updated: 2010-03-18 14:38
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WASHINGTON - A stronger Chinese yuan will eventually hurt US exporters and cost US consumers more, said two US foreign exchange experts in an article published Tuesday by the US Foreign Policy journal.

Their comments came as Washington politicians are raising pressure on China to strengthen its currency.

"The escalating calls for China to re-balance its currency are based on deeply-flawed assumptions and will only make Americans pay more for their favorite products -- like iPhones," said Dan Newman, an economist in Seattle, and Frank Newman, former deputy secretary of the US Treasury.

In the article titled "Hands Off the Yuan", the two experts said the notion that a stronger yuan against the US dollar would boost the US domestic production and reduce the US trade imbalance is based on wrong assumptions.

Under the pressure of the election year and high unemployment, US Senator Chuck Schumer and four other senators proposed legislation on Tuesday to press China to appreciate its yuan.

In their bill, they threatened to impose a 27.5-percent tax on Chinese products imported into the United States if China does not let yuan appreciate.

The move came two days after Chinese Premier Wen Jiabao said that the yuan is not undervalued.

The Newmans argued that "making Chinese products more expensive in the United States will do nothing to shift production to US factories.

"Increasing the value of the yuan does not increase US exports by making them cheaper abroad. If the yuan rises in value, it does not spur Germans to start driving Fords" they said.

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And a stronger yuan in many cases means higher costs for US goods, too. A large proportion of goods imported from China are not end-state products, but only components for further assembly in the United States.

"If yuan becomes stronger, it will increase costs for American consumers," the article added.

"A rise in the yuan, though, would nudge production toward other developing countries, giving the United States an artificial indicator of success: the trade deficit specific to China would fall. But the overall trade imbalance would likely actually worsen.

"To buy the same $100 phone, an American would send $130 to Beijing or perhaps $120 to Singapore. In either case, more dollars would go abroad for the same goods."

The article added that "there is a better way to improve the US trade deficit and help American workers and consumers. To do so, Washington needs to help provide opportunities for US exporters."

The Newmans also suggested that the United States and its skilled workers should see more success by focusing on improving ways to get their goods and services to the billions of people who want them.