Higher Yuan Will Raise U.S. Interest Rates, And Won’t Offer Much Help to U.S. Manufacturing

The higher value of the Chinese yuan that will result from de-coupling it from the U.S. dollar will make Chinese goods somewhat more expensive here, but it won’t make U.S.-made goods cheap enough in China to boost sales much. After all, China’s per capita income is roughly $1,260 per year. In addition, by buying more yen, euros, and other currencies—and fewer dollars—to keep the yuan in line going forward, the value of the dollar will fall and U.S. interest rates will rise. Where is the upside to this for the U.S.?

(PRWEB) July 22, 2005

New Jersey consulting firm Business Restoration Partners, LLC, is nearing completion of a comprehensive forecast of the Chinese economy through 2015, and they’ve been thinking about the yuan quite a bit over the last few weeks. International economist James A. McCune, Principal Consultant for Business Restoration Partners, suggests several good reasons why the rising yuan won’t help U.S. manufacturers as much as government officials hope it will.

“The most important reason,” claims McCune, “is that 70% plus of the goods America imports from China are “re-exports”; goods that have been mostly made somewhere else and then exported to China for final assembly, before China, in turn, exports them to the U.S. Just as surely as the revaluation of the yuan will make goods China exports to the U.S. more expensive, it will also make goods China imports cheaper. Hence Chinese businesses will, for the most part, have the flexibility to lower prices and maintain market share, if they choose to.”

"Another reason the rising value of the yuan won't have that much impact on U.S. trade is one many people in the U.S. don't think about," adds McCune, "and that is the fact that 'inland' labor in China is even cheaper than 'coastal' labor. So manufacturers with assembly operations can actually relocate inland to reduce labor costs and offset an additional increment of the price pressure caused by the rising yuan." (The company’s website, http://www.business-restoration-partners.com , lists several additional reasons why the revaluation of the yuan won’t help the U.S. much.)

Returning to the subject of the plight of U.S. manufacturing, Mr. McCune quips: “Congress shouldn’t act so alarmed, or so outraged by the loss of manufacturing jobs in this country . . .and they shouldn’t be treating China as though they all the sudden caused it. It is the natural, inevitable, and predictable result of Congress’ 25 year pursuit of what feels like—even if it’s not quite—a radical free-trade-at-any-cost policy.”

The bottom line, according to economist McCune: “When higher U.S. interest rates are added to higher U.S. import prices and not much help on exports, for the reasons stated on our website, this whole revaluation thing seems a bit too much like ‘smoke and mirrors,’ and not enough like a real positive for the U.S. economy”

To find out more about BRP’s upcoming release of their comprehensive 10-year outlook for the Chinese economy: "China’s Economy: The Outlook Through 2015," visit their website at http://www.business-restoration-partners.com

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