Several American senators are planning to introduce a bill in the Senate to push China to accelerate the rise in its currency, in order to ease its gigantic trade surplus with the United States. This only proves that politicians don't understand economics very well.
The intended consequence of this bill is to sell more American goods to China and slow the flow of Chinese goods into the USA. However, a sharp rise in the RMB may well have other effects:
- American firms with factories in China will receive smaller profits from them in US$ terms, losing money they might have otherwise have invested back into the US.
- American households will find themselves paying more for just about everything, as almost every manufactured product in WalMart is now made in China and will cost more.
- This will not bring manufacturing jobs back to the US, as hoped; it is far more likely that they will move to other countries with low labour costs and relatively undervalued currencies.
- China will be less able to afford to purchase American products such as Boeing aircraft, Microsoft and Oracle software, other high technology items, and grain.
- China will produce even more pirate DVDs, as genuine Hollywood movies become more expensive in RMB terms.
- Perhaps most surprising of all, this move could help to end America's illegal invasion of Iraq. Bush's ruinously expensive war (see latest cost in the right side column here) has run up a massive budget deficit, which has been largely financed by borrowing through issuing US Treasury bonds. The largest purchaser of these is China, which holds a large part of its enormous foreign exchange reserves, accumulated because of the trade surplus, in this form. Without this to fall back on, America will have problems coming up with the funding to maintain its occupation - certainly the American people will be in no mood for a tax rise (see 2 above).
Have they really thought this out, I wonder?
No comments:
Post a Comment