Friday, November 12, 2010

Oregon's Exports and Currency Manipuation

Rich Read has a very nice article in today's Oregonian about the healthy uptick in Oregon's exports.  This is what I have been telling reporters for some time now, the silver lining for Oregon is the very healthy growth happening in East Asia, particularly China.  The trend highlighted by Read suggests that though Oregon is one of the harder hit states in this recession, we might have an earlier and healthier rebound than other states.

But this brings up a fascinating global debate right now about countries and their currencies and how currency manipulation can lead to unfair trade advantages.

To make is as clear as possible let's get a few preliminaries out of the way.  Exchange rates determine the cost of imports in a country.  So if the dollar goes up relative to other foreign currencies imports become cheaper for US consumers.  At the same time exports become more expensive.  As we import a lot of what we consume, the overall welfare affect of currency movements is not clear: a cheaper dollar helps US exporters, but makes imported inputs (like rare earths for example), and final goods consumption more expensive.

The US is currently putting pressure on China to stop actively keeping the value of its currency low so that US exports to China will become more affordable to the 1.2 billion Chinese consumers that are quickly getting real buying power.  Doing so will make Chinese imports to the US more expensive, so that iPhone you want may raise in price should this happen.

What will happen to Oregon is not exactly clear.  We export a lot of raw materials and inputs (like computer chips) to China where they are turned into finished consumer goods and sent back here.  So the inputs will become cheaper to Chinese manufacturers but the final good will become more expensive.  The value added in China will increase so overall one would expect a decrease in demand for these goods in the US.  But this is almost surely to be countered by the increase in demand for these same products in China.

Of course, the US is now facing similar criticisms for its policy of quantitative easing.  By printing new money, you increase the global supply of dollars and this will cause the dollar to fall relative to other currencies.  So is this unfair manipulation?  Now you see why it is so hard to write rules about this in the context of the WTO.  The Obama administration makes the point (very valid in my view) that a strong rebound of the US economy would more than make up for the devaluation.  We are the world's biggest importer and the biggest market for most of the world's export goods.  Getting US consumers back in the game is probably the first order of priority.  

So, in the end I don't think Chinese currency manipulation is that big a deal for Oregon in the short-run given the nature of what we ship over there, but could have significant impacts in the long-run.  If Chinese consumers suddenly had increased buying power for consumer electronics then this would help Intel for example.  And I don't think that the temporary quantitative easing is a big deal either in terms of global trade.  The key distinction in my mind is the short-term manipulation for a clear policy goal of the US versus the systematic long-term manipulation of the Chinese.  The former is not a problem, but the latter cannot go on forever.

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