Cheat on, China

In an increasingly partisan world, Republicans and Democrats can always count on finding common ground regarding America’s most daring frenemy — China. From President Barack Obama demanding it “play by the rules” of international trade to Mitt Romney denouncing it a “currency manipulator,”  China has somehow managed to tick off both sides of the aisle.

With China announcing an enormous 45-million jobs plan Wednesday, some worry that U.S. jobs are being lost to competitors overseas. This situation is not true. To see why, let’s follow that last dollar you spent at Walmart as it leaves the United States.

When an American imports something from China, he must pay with the Chinese currency, the Renminbi. He purchases the largest denomination of Renminbi, the yuan, with dollars and uses it to pay the Chinese business for its product. The person who sold yuan to the American now holds dollars.

Eventually, those dollars will be used to buy American-made goods and services. These purchases will drive employment in the U.S., so no net unemployment is created by trading with China. This is the classic argument against trade causing unemployment.

What if Chinese businessmen do not return the dollars to U.S. markets to purchase their share of American goods and services? In that case, U.S. parties effectively traded bits of paper for real goods and services, a great deal for the domestic economy.

When the American trades dollars for the yuan needed to purchase Chinese goods, he drives up the price of yuan in terms of dollars. Currently, it’s Chinese policy to partially counteract the exchange by purchasing dollars with yuan, so the dollar-yuan exchange rate remains unaffected.

The policy of counteracting movements in the exchange rate is what Obama and Romney think of when they denounce China for unfair competition against domestic companies.

They say it is unfair because if the Chinese central bank purchases enough dollars, then the yuan will be stubbornly undervalued no matter how many Chinese goods the U.S. buys.

Ironically, China’s chronic undervaluation of its currency makes the U.S. economy richer for two reasons.

First, the prices we pay for imports from China are cheaper than equivalent products made in America. That is why we import them. A more undervalued yuan only decreases these prices even more.

Second, capital resources in the U.S. freed from producing what China sells us go on to other productive purposes, allowing greater domestic consumption and investment. Indeed, we use up more than we produce — U.S. consumption and investment, including the government, outstrips U.S. domestic production.

China’s currency policies allow us to have this “free lunch.” It’s only free because China pays for it. Condemning China’s currency manipulation is like snatching the check out of China’s hands and saying, “No, really, let me pay for this.”

As it turns out, we are starting to pay more of the bill. In the past year, the yuan has appreciated by more than 4 percent versus the dollar, and the Chinese Central Bank has positioned itself to allow it to appreciate further.

Maybe the political pressure is working.

­— bmritz@indiana.edu