In 2004, the yuan ended the year 8.28 to the dollar. In 2011, it ended the year 6.31 to the dollar, a 24-percent rise. In 2004, America’s trade deficit with China was $162 billion; in 2011, it was $295 billion. Those demanding a 30 percent appreciation got most of it—and the trade deficit mushroomed $133 billion.
The currency crowd might respond that the situation is complicated, that there are many factors and different ways to measure the exchange rate. True.
So why would anyone serious about this issue expect another 20 or 25 percent rise by the yuan to create lots of American jobs?
Answer: No one serious about the issue would.
Serious people would point to U.S. exports to China for the first time eclipsing $100 billion in 2011 as good news but the drop to 13 percent growth from a more rapid pace as a bit disturbing. Also a bit disturbing is the composition of American exports.
Top 10 U.S. Exports to China, 2011
|Category||Value ($ billion)|
|Waste and Scrap||11.5|
|Semiconductors and related products||5.2|
|Meat and poultry||2.2|
|All U.S. exports||103.9|
The leading item is waste and scrap, which certainly does not fit comparative advantage. The performance of agriculture, led by soybeans, does make sense given the huge American lead over the PRC in arable land per person. Aircraft and plastics materials also fit, though the volumes would be higher if the Chinese market were fully open. Autos may be a surprise given recent disputes—the U.S. sends completed cars to China, which sends parts back.
It is reasonable that semiconductors and computer equipment are on the list, but it is seemingly not reasonable that the totals are so low. This becomes stark in comparison to Chinese exports. Including printed circuit assemblies, China exports more semiconductors and related products to the U.S. than the reverse. Computers are far worse: The PRC sends many times the value of computers and equipment to the U.S. than the reverse.
Top 10 Chinese Exports To the U.S., 2011
|Category||Value ($ billion)|
|Toys and sporting goods||21.7|
|Women’s and girl’s clothing||19.1|
|Semiconductors and related products||13.6|
|All U.S. exports||399.3|
Further, there is the prominent place for communications equipment, such as cell phones, in Chinese shipments. Why isn’t the more advanced economy sending technology products to the less advanced economy?
Maybe it is, at least somewhat. Trade statistics suffer from a serious problem. When the U.S. sends semiconductors or plastics material to the PRC, those are counted as exports. Fine. When China takes that material and turns it into computer equipment or plastic products, the full value of the good is credited as a Chinese export. But China just assembled the computer or molded the plastic. Not much of a computer’s value is in the assembly; more of a plastic product’s is, but still not all. This is the iPhone story, where the PRC gets credit for the whole iPhone but adds only a small amount of value. Chinese exports are overstated, especially in technology.
Other major exports include long-time mainstays. Textile shipments as a whole exceeded $50 billion. Chinese exports rose less than 10 percent, but the greater value of goods moving east meant the trade deficit expanded even though American shipments grew faster.
Does this matter? Yes. The extra dollars the PRC gets are chiefly invested back into U.S. treasuries, affecting our bond market. More important, the persistence of a large imbalance suggests structural economic flaws in one or both partners. The U.S. federal budget deficit and the PRC’s investment-consumption gap are the most prominent of these.
What doesn’t matter is the exchange rate, which is why the deficit ignores exchange rate moves. What also doesn’t matter is the precise dollar amount in light of the iPhone example. There will be a lot of loud talk this year about the “$300 billion deficit.” But those who are serious will talk about getting the U.S. economy on track and pushing the PRC toward fundamental change that gives Chinese consumers the same opportunities that Americans have.