Tuesday, March 16, 2010

I am a Pessimist

. Tuesday, March 16, 2010

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.

Update: Here is a nice comprehensive and comprehensible table of US imports from China by product category.


Kindred Winecoff said...

Thanks for taking out the trash on this one.

Another point is that the world is not comprised of just the US and China. If China allowed its currency to appreciate we surely would import fewer goods from them... but we'd import more from Vietnam and Cambodia and Malaysia and Taiwan and etc. On net it's not clear that our trade balance would improve at all, unless China's revaluation causes them to import more goods from us. (But again, they may just import stuff from Vietnam and Malaysia.)

I am a Pessimist
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