This week The New York Times strongly criticized China in two different articles for stifling appreciation of the Renminbi (Chinese currency) to increase the competitiveness of Chinese goods in the international market.
The Chinese government’s economic policies are most frequently reprobated in international media. But of course, this is done mostly by critics outside of China. The fact remains that Chinese policies will remain focused on national interests without considering foreign interests unless foreign interests strongly intertwine with national interests ó and there is little reason for the status quo to change.
Why should China reverse its policies that adversely affect the U.S. or European countries but to its own advantage, such as purposefully stifling the market determined value of the Renminbi?
One good reason is that Washington may implement its threats of imposing heavy import duties on Chinese goods which will drive Chinese firms out of competition in U.S. markets. European countries may follow. Recently the Chinese government faced strong opposition at home from large Chinese corporations who fear the same. In response, Chinese government officials have remained steadfast to their initial stance simply reiterating that appreciating the Renminbi may lead to social unrest in China. In other words, China may have to face the same problems that the U.S. faces ó trade deficits, unemployment, and economic crises.
The Obama administration realizes that China will continue its infrequent and informal promises to appreciate the Renminbi soon, but it will never actually do so unless threatened with tangible consequences.
Thus, Congress has declared that it will increase import tariffs on Chinese goods if negotiations do not resolve the potential threat of ëcurrency wars’ with China. However, going back on its informal promises to appreciate the Renminbi, the Chinese government has reiterated its initial stance that appreciating the Renminbi will likely result in social unrest in China; something the government cannot afford. Does the Chinese government really not care about losing access to huge Western markets?
The fact remains that China understands what it means to be a democracy and the U.S. is a democracy by all means. As in many other democracies, corporations retain a strong influence over the government and high-stake lobbying continues officially as well as unofficially.
The U.S. is no exception. Some of the largest U.S. corporations in the industry of durable consumer goods (such as electronics) as well as perishable goods (such as food items) rely on Chinese imports for their businesses to be lucrative.
A large percentage of China’s exports to the U.S. consist of intermediate goods that are processed in the U.S. and sold locally. Thus, large U.S. corporations that are dependent on Chinese exports serve as a safety net for China. The Chinese government has every reason to rely on these corporations who will employ their lobbying powers to prevent imposition of additional duties on Chinese imports in order to safeguard their own profits.
In the 21st century, communist countries are enjoying crucial advantages over democratic countries that are manifesting in international trade and politics. Citizens of communist countries may face undesirable constraints on their personal freedoms; however, in the realms of international trade and politics, communist countries are definitely coming out on top owing to stronger and more independent decision-making capabilities.
Thanks for commenting, Kipaya!
In reply to your first question, I think both communist forces as well as the Chinese government’s response to the needs of local businesses contribute to the decision to artificially lower the exchange rate. However, I do agree that ultimately the exchange rate policy for China lies in the hands of a handful of politically powerful economic policy makers sitting at the top of the Chinese governmental hierarchy.
As of now, China seems to be the only country thats pretty visibly coming out on top by maintaining artificially low exchange rates; however, I did come across at least three other names of countries that had started following China in exchange rates artificially low.
I do, however, strongly disagree with your last point. I grew up in Pakistan, I traveled to India, and I have spoken to friends in Bangladesh & Nepal about this – it seems like despite cheaper labor costs in Pakistan/India/Nepal, Chinese goods seem to be aggressively invading and dominating South Asian markets. I came to the US for college, and guess what, from cheap lamps to bed-covers, Chinese goods are provided huge quantities at the Walmart. Keeping in mind that Chinese goods are more price-competitive than goods produced by other countries, I find it hard to believe that China’s middle class is frustrated for not being able to use their money to buy foreign goods.
I think the only class in China that really wants imported goods, for a higher quality or for any other purposes, is the upper or elite class in China. I think the middle-class Chinese man finds everything at local Chinese market and has little to no reason to want to buy foreign goods. At the same time I have a limited knowledge of what goods China imports and it would be interesting to look into that, but I did spend a couple minutes to look that up, and I didn’t see any consumer goods that the Chinese middle-class typically imports. However, due to my limited knowledge of Chinese imports, I may be wrong here (but I doubt it until you show me otherwise).
Also, from the perspective of the Chinese economic policy makers, I ‘think’ their decision to play around with exchange rates is primarily geared towards making their ‘exports’ competitive in international markets as opposed to limiting imports into China from other countries (although, obviously, the two do happen simultaneously).
I think the bigger question is how this decision to keep exchange rates low is affecting local Chinese businesses that have to import raw materials (like organic chemicals, steel, copper, oil, etc.), how its affecting the US, and most importantly, why China has consistently been very resistant to letting their currency appreciate (the Chinese seem to be pretty sure its the right thing to do in terms of national interests despite all sorts of threats from the West).
Thanks for commenting!
Usman, you raise a number of interesting, but at times conflicting, points. The approach of mid-term elections have made this particular issue very popular all of a sudden, though of course in reality, it has been near the front of economic policy debates worldwide for years. So three quick things:
1. From what I understand of your argument, you believe that China’s insistence on artificially lowering the exchange rate is both them acting as a communist force in the world as well as responding to the needs of local businesses in a democratic fashion? While China presents an interesting case of dual political/economic systems (Democratic, liberal economic policy paired with authoritarian political policy), I think their exchange rate policy remains the result of decisions made by economic policy-makers at the top of the Chinese political food chain.
2. What other communist/authoritarian governments are coming out on top?
3. I feel like there are some important domestic factors you’re neglecting. From the perspective of local Chinese workers, who’s incomes have on average increased steadily over the last decade, China’s artificially low wages are becoming as much a problem for them as for politicians here claim they are for the American people. In terms of China responding to a democratic push in regards to economic policy, I think it will be interesting to see how it deals with an increasingly frustrated working class who want to use their money to buy foreign goods.