The exchange rate between the US dollar and the Chinese Renminbi Yuan (RMB) is of crucial importance to both the American and Chinese economies since the bilateral trade between the two nations (imports plus exports) is nearing $600 billion per year. America’s exports to China lag imports from that country—a huge deficit of $318 billion in 2013.
For at least 18 years, the US has been pushing China to appreciate its currency in order to make Chinese goods more expensive to US buyers and/or reduce profit margins for the Chinese exporters in order to reduce the deficit. Grudgingly, the Chinese have yielded to American pressure and entreaties, and under the direction of their central bank they have engineered a gradual 35 percent appreciation in the nine years since June 2005. The RMB, which was pegged at 8.27 per dollar in June 2005, has today risen to 6.1. All indicators point to an unwillingness on the part of the Chinese to appreciate their currency any further. With the now stronger RMB and persistently higher materiel and wage inflation in China’s manufacturing sector, many Chinese factories have reached the point where they are not as competitive anymore. This is the main reason we should not expect further appreciation of the RMB for a while.
My YaleGlobal article gives a rare historical perspective from the year 1980 on the RMB vs. dollar exchange rate, as well as on inflation figures from both economies. This analysis shows how the RMB has gone from overvaluation in the 1980s, to undervaluation between 1990 and 2005, to today’s exchange rate, which several observers feel is near an appropriate valuation.
In 2012, I was one of the observers who indicated that American manufacturing productivity was, by far, the best in the world. (See my August 7, 2012 Yale Global Online article “7 Reasons to Expect US Manufacturing Resurgence,” which provided figures from the International Monetary Fund and the US Bureau of Labor Statistics.)
In all productivity indicators except one—where China topped the US—American manufacturing productivity was, and remains, unsurpassed by any other nation. Productivity indexes include “value of output per worker” or “value of output produced for every worker hour,” where the US remains way ahead. Most American citizens who visit a Walmart or a Macy’s and see the flood of Chinese products do not realize that, until 2010, the US was also the world’s biggest manufacturer by value. Of course, China produces the largest number of manufactured items. But China may produce 5 million toasters whose total value does not equal that of one Boeing 737 aircraft. Because America concentrates on high-value manufacturing—even with fewer items produced—total manufacturing value is, in 2014, the second highest in the world.
Moreover, I predicted that US competitiveness as a manufacturing location was likely to improve, while China would begin to lose its luster. A recent report by the Boston Consulting Group, using their own criteria, compared countries for their attractiveness as manufacturing locations. The report puts the US at very near the top, its competitiveness gaining on the Chinese.
The reasons include the rise in the exchange rate for the Chinese currency, the Yuan or Renminbi Yuan (RMB), and wage inflation in China that has been running lately at more than 15 percent annually in that nation’s eastern seaboard, where most of China’s factories are located. By contrast, not only do American companies invest much more heavily in automation, but US workers (especially low-skilled laborers) have seen their real (or inflation-adjusted) hourly wages fall in the last two decades. Union membership is below 10 percent of the US workforce, and the severe recession of 2008–2013 has even meant that 40 percent of recent American college graduates hold jobs that do not really require a college degree.
In short, American firms are typically superbly organized with IT processes and automated or robotic equipment and can hire educated, skilled workers at lower real wages than in the 1980s. Over the last two decades, the US dollar has weakened against several major currencies, such as the Euro and Yen, which in itself makes American products cheaper and more attractive than those of many European and Japanese competitors.
Does this indicate a US manufacturing renaissance? Probably not in a big way (for reasons I also detail in my Yale Global article). Besides, as nations such as Mexico and Viet Nam get their economic act together and improve their education and skills, such newly emerging nations can partially replace Chinese manufacturing. But American manufacturing is not going away, either, and will remain—by far—the most productive in the world.
This archive contains 2014 & 2015 posts discussing international business issues, focused on both economics and culture, in an unbiased manner. Managers, students, policy makers, and educated laypeople will gain insights on current issues, future trends, and historical perspectives.