MG: It's true there are many US subsidiaries exporting back into the US market. But they mostly assemble goods provided by Chinese and other low-cost Asian and offshore suppliers, and use low-cost Chinese labour when they manufacture - all paid for in yuan. So a a stronger dollar which buys more yuan boosts their profits, which in the main come from the markup on their products when they are sold stateside to US consumers in stronger US dollars. In other words, they buy in a cheaper currency and sell in a dearer one.
RB: > 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.
MG: See above. Not buying from themselves, but buying labour from Chinese workers and goods from Chinese suppliers.
RB: >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....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?
MG: There is a consensus among US, Chinese, and world business and political leaders that the yuan should rise against the dollar in order to stimulate the development of the lucrative Chinese home market and increase the savings rate in the US, both of which would have the effect of reducing the potentially dangerous trade deficit.
The issue turns on the pace and degree of revaluation. Certainly, smaller US businesses which largely serve only the US or hemispheric markets and are faced with competiton from lower-cost goods manufactured in China have an urgent desire to see the yuan appreciate, hopefully making Chinese exports more costly to US and hemispheric consumers.
You would expect big multinational exporters like Boeing and Caterpillar would also have an interest in a strong yuan to facilitate their sales into the booming China market, but they are doing great business there now under the current exchange rate, and a dollar devaluation would have the offsetting effect of raising their production costs which also depend on a global supply chain of low-cost foreign labour and parts.
I haven't seen any evidence Big Business is pushing Paulson to turn the screws on the Chinese. In fact, the Wall Street Journal editorial page, which is a good reflection of prevailing sentiment within the the US ruling class, is dead set against the bills which have been inititiated in Congress threatening trade sanctions against China unless it allows the yuan to rise more quickly. Paulson is only trying to defuse congressional opposition by making tough-sounding noises against the Chinese, with whom he has always had excellent relations.