>The US imports five times as much from China as it exports to it - the
>bilateral trade deficit last year was more than 230 billion dollars- so
>there is an immense benefit to US consumers and to US corporations in
>keeping the yuan weak relative to the purchasing power of the dollar.
>Walmart alone imports close to 20 billion of goods annually from its Chinese
>suppliers, and pays its Chinese employees in yuan.
If dollar depreciates, US companies exporting from China will only have more yuan to convert into dollars. Perhaps 50% of these 'imports' are from US companies. International trade is intra corporate trade and depreciations may now be sought not to bolster exports but profitability of foreign operations in the home currency. Globalization is a strange world.
>If the yuan were to appreciate against the dollar, it would shrink the trade
>deficit, but at a huge cost to American consumers and businesses dependent
>on Chinese goods.
Perhaps the trade deficit with China, and I am not even sure that it is true.
>Their number far exceeds the number of businesses selling
>into China who would benefit from a stronger yuan.
But if US companies are buying from themselves, a stronger yuan would not really hurt them, and again we don't really know the extent of yuan holdings by US companies. We do know that US corporate profitability is strong abroad, and gets a free ride from dollar depreciation. So I don't think it's unreasonable that Paulson's attempt to appreciate the yuan may be motivated by attempt to raise profitability of US operations in China.
>Until that political
>calculus changes - which is not remotely on the horizon - a "tough line"
>with China will remain more rhetoric than reality, and China will revalue at
>its own pace and in accordance with its own domestic needs.
But if there is more reality here than rhetoric, if Paulson is serious about yuan appreciation--and I am not convinced that his talk is not serious--we need an explanation. It's not clear to me that a stronger yuan will help declining industries against foreign competition as such; nor is it clear to me that small business wants an end to cheap yuan. How are small businesses threatened as opposed to helped by a cheap yuan?
Rakesh