U.S. Unemployment Could Help Close Trade Gap With China

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Includes: FXI, PGJ
by: Cam Hui, CFA

There has been much angst in the aftermath of the Chinese announcement of further currency flexibility. Despite the hoopla, the RMB barely budged against the USD in the wake of the news.

The source of friction in Sino-American relations is the US-China trade gap. There are some other adjustments in evidence that could close the gap, notwithstanding any change in exchange rate. Firstly, on the China side, the Chinese minimum wage went up by 20% in early June. In addition, an article in Bloomberg/Business Week states that American companies are getting better quality local workers at a cheaper price as the discouraged unemployed take a job...any job:

The 6.8 million Americans out of work for 27 weeks or longer -- a record 46 percent of all the unemployed -- are providing U.S. companies with an eager, skilled and cheap labor pool. This is allowing businesses to retool their workforces, boosting efficiency and profits following the deepest recession since the 1930s.

Rising wages in China and falling wages in the US makes the Chinese labor arbitrage less compelling. These factors are more powerful than the exchange rate adjustment the American politicians want to beat the Chinese over head about and should serve, in the long run, to alleviate some of the trade tensions.

…until multi-nationals migrate to even lower wage countries like Vietnam.