The Blog

Unpegged?

What China's new "floating" currency really means.

12:00 AM, Jul 26, 2005 • By IRWIN M. STELZER
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

So, too, will U.S. interest rates. Chinese purchases of U.S. treasuries have helped to keep interest rates down. With fewer dollars to spend, the Chinese might ease up on those purchases. That would add to the upward pressure that Alan Greenspan, rapid growth, and a tightening labor market are already putting on interest rates, which might burst housing bubbles from Miami to Las Vegas.

Not all the news is bad for the United States. Wal-Mart and its customers might suffer, but Boeing airplanes will be cheaper in China, and firms such as MacDonald's, Tiffany, and 3M, which have substantial earnings in the Chinese currency, will get more dollars for those renminbi when they convert those earnings into the U.S. currency.

But the politicians who have been arguing that a revalued renminbi will markedly affect the trade deficit, and stanch the movement of jobs from developed countries to China, just don't know how to do their sums. It is China's overwhelming comparative advantage in labor costs that has enabled it to displace American products in many sectors, from apparel to shoes to electronic products and, soon, autos. No conceivable change in exchange rates can restore American competitiveness in those industries. Fortunately, superior American technology, the flexibility of its work force, and its labor markets, and the robustness of domestic demand are offsets, contributing to job-creating economic growth.

Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.