Outsourcing and Currency Wars

October 10, 2010 at 4:59 pm | Posted in Political Economy | Leave a comment
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The US Department of Commerce reports that in the last two years, the number of employees of foreign affiliates and subsidiaries of US firms grew by 729,000 while these firms cut some 500,000 jobs domestically over the same period.


Candidates of both major parties lay the blame for this on the Chinese government intervening in currency markets to keep the value of the renminbi artificially low and thereby gain an unfair advantage against US workers as companies ship manufacturing operations off-shore to take advantage of wage differentials.

But the emphasis in this argument is misplaced. In the first instance, manufacturing jobs have been disappearing from the United States for several decades. The Bureau of Labor Statistics reports that in September 2010 alone, more private sector jobs were created in the United States than in the entire 8 years of the George W. Bush Administration.


More significantly, a look at China’s trade statistics reveals that its huge current account surpluses with the US and the European Union is counterbalanced by substantial deficits with its East and Southeast Asian neighbors. Indeed, components and intermediate goods dominate intra-Asian trade and China has emerged as a assembly point for parts manufactured elsewhere. This implies that any appreciation of Chinese currency could mean that China could import more intermediate goods and thereby offset any gains that might accrue to US producers from the higher value of Chinese wages. There is also no guarantee that manufacturers wont shift jobs to other low wage countries like Laos, Cambodia, or Vietnam if Chinese wages increase

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