• Wed
  • Nov 26, 2014
  • Updated: 1:33pm

It does not compute. Global economics, but not as we know it, Jim

PUBLISHED : Sunday, 11 April, 2010, 12:00am
UPDATED : Sunday, 11 April, 2010, 12:00am
 

Analysts saw Geithner's visit to China as a last-ditch effort to make some progress on the yuan issue because the Obama administration was coming under mounting pressure from Congress and businesses, which argue an undervalued yuan is undermining the US economy.

SCMP, April 8

Let's review how this 'undermining' supposedly works. What we have, says the accepted story book, is China rigging the yuan by fixing it at an unjustifiably weak level against the United States dollar.

This renders wages in China very low in US dollar terms and therefore allows China to export goods to the US at low prices for American consumers. Conversely, imports from the US are very expensive in China because they cost so much in those artificially cheap yuan. The result is a huge trade imbalance with the US.

If only we could tell Beijing to revalue the yuan to a stronger level then China's exports would have to be priced higher and its unfair advantage would be gone. Trade would then come back into balance and we would all live happily ever after. Have I got the story about right?

Good. Then look at the first chart. The blue line on top tells you that average wages in China have gone from the equivalent of US$66 a month 12 years ago to US$400 a month now, an increase of more than 500 per cent. I won't absolutely swear by these official statistics but we are talking such a huge scale of movement that the story they tell can't be far wrong.

Note two things in particular. The first is that this is not much money anyway when compared with the US$2,700 a month that the average production worker makes in the US. If Beijing were now to agree to a 20 per cent revaluation of the yuan, which is actually past the outer edge of what anyone is talking, the average wage in China would rise from the equivalent of US$400 to US$480. Will this really make the Chinese worker less competitive against a US counterpart paid US$2,700? I mean, really?

And if a 500 per cent increase in wages over the last 12 years went merrily along with the emergence of a huge trade surplus with the US, would a 20 per cent increase in wages really do anything to dent that surplus? I mean, really?

Now look at the red line in the first chart. This gives you the average monthly wage in US dollar terms for cotton textile workers in India. In 1998 it was about the same as the average wage in China and it has not gone up much since that time. Wages in China are now about four times as high. This must naturally confer an enormous competitive advantage on these Indian textile workers. The rag trade in India ought to be booming, just eating the heart out of China's market share in rag exports to the United States.

Look at the second chart and think again. It is China that enjoys the export boom to the US in fabrics and apparel. India's share is barely a tenth of China's and going nowhere.

Puzzling, isn't it? Does not compute. This is not the way things are supposed to be. The book says that if your wages go up you will become less competitive against people whose wages have not done so and your exports will decline relative to theirs. Yet the opposite has happened here.

I doubt that people in the export trade are quite so baffled by this, however. They know that the story is much more complicated than a career civil servant like Timothy Geithner is likely to appreciate.

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