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by Thomas Oatley

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If you hadn't noticed, Paul Krugman has taken to advocating a "get tough with China" policy to promote a currency realignment. In his blog, he defends his belief that a stronger renminbi will reduce China's trade imbalance. One argument he advances is that relative price shifts brought about via real exchange rate appreciation will be sufficient to induce the US to import less from China. He argues against excessive export pessimism on the grounds (in part) that " it’s really important not to get caught up in the fallacy of misplaced concreteness. If you can’t think offhand of ways U.S. production might replace imports, that’s probably because you just don’t know enough."

In the interest of knowing more, therefore, I present the pie chart above. It depicts the importance of each major category of American imports from China in 2009. The data come from the USITC. Twenty-two percent of US imports from China were in textile, apparel, leather. Another big chunk -- more than 10 percent -- was in miscellaneous manufactured goods such as toys (half of this category in value) and sporting goods. All of these goods are labor intensive in production and are not coming back to the US as a result of a 20 percent currency realignment.
Another 36 percent of US imports from China are computer and electronic products. It is tempting to think of these as high tech production that can migrate back home. It makes more sense to think of these as labor-intensive assembly operations. Yes, my iphone was manufactured in China. The components from which it was produced, however, were not. In fact, in the most sophisticated elements in this category -- microprocessors -- the US exports more to China than it imports from China. So, most of this manufacturing activity is not coming back to the United States either.
Thus, two-thirds of the products the US currently imports from China are quite clearly products that American businesses will not produce at home unless the dollar falls by substantially more than 20 percent against the renminbi. The remaining third do not seem to be fundamentally different, with a few noticeable exceptions that constitute a small share of total imports.
Consequently, with all due respect to Professor Krugman, I struggle to see how a stronger renminbi can cause American consumers to substitute home for Chinese versions of these products. For this reason, I am an export pessimist.
Here is a nice comprehensive and comprehensible table of US imports from China by product category.
Meanwhile, Emmanuel-across-the-pond drools over the latest congressional hysteria about the renminbi. As the FT reports,

More than 100 members of the US Congress on Monday called on the Obama administration to label China a currency manipulator, in a move that highlighted the pressure on Washington to take a more confrontational stance towards Beijing.

In a letter to Timothy Geithner, Treasury secretary, and Gary Locke, commerce secretary, the 130 Congressmen demanded the administration designate China a manipulator when it issues its regular report on currency manipulation next month. They called for countervailing duties to be imposed on Chinese imports.

I, myself, am astonished to learn that the leaders of this movement represent states with major manufacturing industries. I would point out that "helping the American manufacturer" is costly for American consumers, most of whom do not work in manufacturing industries (and this is not because of China's currency policy). If the Democrats truly wish to represent middle-class interests, they shouldn't be so intent on reducing real wages.

Disclosure: No positions

Source: Why I Am an Export Pessimist