Centerblue.org

Chinese manufacturers, the makers of the collective cheap garbage and detritus consumed by Western culture, are screaming because the government is allowing the Chinese currency (yuan) to appreciate a mere 6% against the dollar.

Serves them right.

In order to compete on the world market and help its manufacturers, China has for a long time artificially pegged its yuan to a certain exchange rate with the dollar, so that it goes up and down as the dollar does instead of just based on market forces. This has caused its exports to America to remain dirt-cheap, and has created a huge problem and trade deficit for the US. It has made manufacturing unprofitable in the US compared to China, and many of our factories and jobs have fled as a result. China has taken its enormous trade surplus with us and invested it in US Treasury bonds–IOU’s by the government that it must eventually repay. Just like a bank really owns your house as long as you have a mortgage on it, China is the US’s biggest creditor and can use that leverage in the future to enormous effect.

But cracks are appearing in China’s scheme to achieve world domination by manufacturing cheap garbage. Its economy is overheating and faces a meltdown if it continues its current rate of expansion. It also faces pressure from trading partners to loosen the Yuan-dollar peg or eliminate it altogether. Bowing to reality China has recently allowed the yuan to rise 6% against the dollar.

Suddenly, all these makers of cheap hats, toys, and other worthless gizmoes are having their only competitive advantage ripped from them. They can’t compete on brand name (can you name a single Chinese manufacturing company ala Nike, etc.?). They can’t compete on new or advanced technology. All they have to compete with is a dirt-cheap price on very low-margin products. Make that price increase even a little and profit goes to zero…hence why the manufacturers are screaming.

Our government has for too long tolerated this trade imbalance–although we as Americans have helped it along by buying all the cheap crap sold at Wal-mart. There’s always a day of reckoning though…and as China is being forced more and more to play on a level field with the rest of its partners it is becoming clear that China is still little more than a medieval backwater when it comes to technology and innovation–albeit one with a hell of a lot of money at its disposal.

As market forces re-assert themselves, and as manufacturing continues to become cheaper around the world, China had better find new and better ways to drive its economic growth engine, lest it slowly run out of gas. Designing high quality products instead of landfill filler would be a great start.