Monday, April 26, 2010

How A Chinese Yuan Increase Could Destroy US Jobs

Some analysts believe that a revaluation of China's currency will actually result in a negative impact on US job creation since it will raise manufacturing costs for US firms and harm US competitiveness in most markets (except China). Other analysts dispute this view, stating that the loss of US jobs as a result of higher China manufacturing costs would be small and that in fact, a 10% increase in China's currency valuation would result in a modest increase in US jobs. See the following post from Economist's View.

An argument that revaluation of the renminbi/renembi won't have much effect on jobs in the US:
Will Chinese revaluation create American jobs?, by Simon J Evenett and Joseph Francois, Vox EU: Many in the US are pushing China to revalue the renminbi. Will that create US jobs? Traditional Keynesian analysis associates higher exports and lower imports with more jobs, but today’s world is more complex. Chinese parts and components feed into US firms’ global competitiveness. This column says a dearer renembi would boost the competitiveness of US exports to China but reduce US competitiveness everywhere else. A revaluation may be the right policy for other reasons, but its impact on US jobs is far from clear.

Undervaluation of China’s exchange rate is central to the debate on the right global policy mix in the aftermath of the economic crisis. Estimates of the undervaluation vary (from zero to 40%, Cheung, Chinn, and Fuji 2010) along with the reasons for focusing on the renembi:

* The IMF expresses concern about persistent capital account imbalances and asymmetries between surplus and deficit countries, with concern that imbalances contributed to past global financial instability and could so in future. The IMF also calls an exchange rate appreciation “essential” for China’s domestic macroeconomic situation (IMF 2010).
* Senior Brazilian and Indian officials call upon their Chinese counterparts to revalue the renminbi to mitigate competitiveness concerns.
* In the US, some call for revaluation as a means of redressing the bilateral imbalance with China and quickly creating US jobs.

In this column, we focus on the last issue; that is, whether it is realistic to expect a US jobs bonus to follow a Chinese revaluation. ...

With extensive global supply chains and outsourcing, a modest Chinese revaluation will ... raise costs for US firms and thus harm US competitiveness everywhere except in the Chinese market. This cost-raising effect mutes the current account improvement and, by our estimates, may result in 424,000 jobs losses in the US.

Findings such as these call for a rethink of aggressive foreign trade policy towards China, not just by the US but all those nations that supply and source parts and components to and from China as part of global supply chains.
And, rebuttal:
Estimating the effect of renminbi appreciation on US jobs: A comment on Francois' China result, by William R. Cline, Vox EU: Would appreciation of the renminbi actually destroy US jobs? This column discusses recent estimates that find that making intermediate inputs from China more expensive would hurt US global competitiveness. It argues that the direct effect of an improvement in the US trade balance would create far more jobs than might be lost to more expensive intermediate inputs.

In a recent study, Francois (2010) estimates that if China appreciated the renminbi by 10%, the US trade balance would rise by $100 billion but the number of US jobs would decline by 430,000. He uses a computable general equilibrium (CGE) model to make this calculation. He allows for below-full capacity and sticky wages so that it is possible for a change in the external balance to affect the level of employment. The paradoxical negative sign on employment as a consequence of the currency correction stems from the model specification that emphasizes induced losses of jobs throughout the economy that result as a consequence of the increase in costs of intermediate inputs imported from China and used in the US economy. Francois argues that the gain of employment in exports and import substitutes would be too small to offset the loss of jobs in the general economy; hence the net loss of 430,000 jobs. This column examines whether these results make sense. ...

This exercise suggests that something appears to have gone wrong in the Francois calculations. A reasonable approximation of his two opposing effects suggests that the 10% RMB appreciation would create 320,000 jobs from the US trade balance improvement and eliminate only 32,000 jobs from the induced effect of higher intermediate input costs to US manufacturing. ...
Even if the effect on US jobs is small, we should still care about the effect of China's currency policy on other developing countries. That's where China's currency policy is likely have the greatest effect in terms of shifting the location of manufacturing employment.

The effect of the policy on global imbalances and the potential impact on financial stability is also of concern. However, given the IMF's behavior toward countries that needed help in the past, it's hard to be critical of the desire to establish a reserve fund as insurance against having to turn to the IMF for help. That's why giving countries such as China a larger role in determining IMF policies could help with currency alignment problems. With a credible change in IMF policy, countries could get the help they need when troubles arise at a smaller cost than it takes to build up large reserve balances.

This article has been republished from Mark Thoma's blog, Economist's View.

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