Bush's weak dollar policy & China valuation of its currency-DU economists

[Skidmore]

I have a question. With all the ranting in the House today about China's manipulation of its currency in relation to the dollar, I was sitting here remembering an article I skimmed a few months ago taking the * administration to task over the perils of maintaining the policy of keeping the dollar weak. Am I correct in assuming that the combination of these two separate monetary policies are a core component the Walmarting of America? I realize I may be totally off target. I am not an economist and I don't play one on teevee either.

[wli]

1. not an economist, but I do have a couple small things

Namely, look into "wage arbitrage" (close relation to offshoring) and "beggar thy neighbor" (monetary policy from the 1930's).

ON EDIT: See Henry C. K Liu's articles at atimes.com for good stuff also.

[DFLer4edu]

2. They are two separate issues which are entwined

China used to peg it's currency exclusively against the dollar. 8.28 yuan equaled a dollar a week ago. This meant that as the dollar slid so did the yuan and the purchasing power of the dollar didn't change from day to day. It was always 8.28 yuan. This meant that a weak dollar didn't hurt US purchasing power in China. That was just dandy for Walmart.
As we all know, China changed its monetary policy last week. The yuan was revalued to 8.11 yuan. It seems like a little change in value and it is, but what is important is that the yuan will no longer be pegged to the US dollar. The yuan will now be a free-floating currency whose value in comparison to the dollar will be based on a basket of world currencies. The result will be that the Chinese will have more purchasing power and be able to buy more American goods because the yuan will have a greater value against the dollar. So where does Walmart come in? Well as the yuan rises against the dollar the purchasing power of Walmart (and that of the rest of the US) in China will fall making everything made in China more expensive than it used to be. The weak dollar will hurt Walmart.

On edit: I've stopped listening to the house Republicans, what are they saying today about China's monetary policy change?

[unlawflcombatnt]

3. Partial Answer

Tonight on CSPAN Senator Dorgan spoke on behalf of those opposed to CAFTA. He mentioned the case of Huffy bicycles, and how they had laid off their American workers and moved their factory to China.

Then he described the working conditions of Chinese workers. Many work for 33 cents/hour. They work 15 hours per day, 7 days per week. When they get sick and can't work, they're fired. If they try to form unions, they're imprisoned.

Basically multinational corporations using Chinese labor have almost eliminated their labor costs. Walmart continues to buy products from companies using this kind of labor.

Will unpegging the yuan fix this problem? No. It will very slightly reduce the profits of the companies that are exploiting Chinese working conditions. It will still be much cheaper to make those products in China.

Won't unpegging the yuan cause the Chinese to buy more goods? No. How are Chinese workers going to pay for American goods when they make 33 cents/hour?

The yuan would have to drop a tremendous amount before it makes a significant difference in our trade balance with China, or the Walmart-ization of America. And the Chinese are not going to let it drop a tremendous amount. They'll re-peg it before that happens.

unlawflcombatnt