Shanghai, China - Pudong District Skyline

Who Benefits When China “Cheats”?

Shanghai, China - Pudong District Skyline
Shanghai, China – Pudong District Skyline
Photo by Charles Cottle

In this election season much has been made of the claim that China cheats economically, and because of this, we in the United States are worse off. Mitt Romney has made China’s cheating a major talking point of his campaign, and President Obama has recently filed trade violation actions against China at the World Trade Organization. For those who may not have followed these issues closely, China is said to cheat in three basic ways. First, it subsidizes its export market in violation of World Trade Organization rules. Second, it actively violates and refuses to protect intellectual property rights. And third, it manipulates the value of its currency.

The third charge, is interesting because while charges one and two seem to be clear violations of trade agreements, the benefits of China’s currency manipulation go well beyond the borders of China. To explain, China’s “cheating” here refers to China’s practice of artificially devaluing its currency rather than allowing it to float upward in currency markets. Weakening the renminbi in this way helps the Chinese export sector by making Chinese imports cheaper worldwide than they otherwise would be. At the same time a weakened Chinese currency vis-a-vis the U.S. dollar works to the detriment of the U.S. export sector as U.S. products in China are more expensive than they otherwise would be. It seems obvious, therefore, that we should pressure the Chinese to value their currency to market prices, rather than artificially keep it at a lower value. The Chinese, of course, refuse to do this, at least to the extent that U.S. policy makers say they would like.

Who benefits from devalued Chinese currency? Clearly, Chinese labor benefits. But also, any company (and its stockholders) that manufactures and exports goods from China and any vendor of Chinese exports benefit because these goods are comparatively cheaper than comparable goods made at home. For example, verification of just how cheap Chinese textiles are as compared to those made in the United States can be easily seen. Indeed, it is increasingly difficult to find clothing made in the United States.

Several years ago I was able to tour the Tianjin Economic-Technological Development Area (TEDA) Tianjin, China. TEDA is one of the largest economic development areas in China. It hosts manufacturing sites for a large number of companies in China’s export sector. Among these companies are a number that U. S. readers will recognize, including Motorola, Toyota, IBM, Schneider Electric, LG, Honeywell, Volkswagen, Fujitsu, Coca Cola, Pepsico, Kyocera, Sanyo, Samsung, Canon, Exxon Mobil, Haliburton, Emerson Electric, Chevron, and AT&T. All of these companies benefit from competitively lower prices as they sell their products to the U.S. market and around the world.

Additional corporations taking advantage of cheap labor and China’s currency manipulation can be found throughout China. A major example is provided by the Hon Hai Precision Industry Co. Ltd. Known as Foxconn, the Hon Hai Precision Industry Company is reportedly the largest electronics manufacturer in the world. It is a Taiwanese company with assembly plants located around the world. Many of its products are made at the assembly and manufacturing complex in Shenzhen, China, located just north of Hong Kong. According to Wikipedia, Foxconn’s major clients are Acer,, Apple Inc., Cisco, Dell Hewlett-Packard, Intel, Microsoft, Motorala Mobility, Nintendo, Nokia, Samsung, Sony, Toshiba, and Vizio.  It is Foxconn that has been in the news recently because of alleged poor working conditions in the facility at Shenzhen.

Here at home, Wal-Mart and other big box retailers also benefit as they sell cheaper commodities to the American consumer. Indeed, it is difficult to find any American made products in Wal-Mart, K-Mart, or Target. Wal-mart has its Chinese headquarters in Shenzhen and according to PBS, sources 80% of its retail inventory with some 5,000 manufacturers, all located in China.  Wal-mart, and vendors like it claim that we, the consumers, are the beneficiaries of lower prices. Lower prices, it is claimed, put money in our pockets. If that is true, then American consumers are yet another sector that benefits from  China’s “cheating.”

It is clear, however, that U.S. labor does not benefit (at least in the short term) as manufacturing moves to China. Wal-mart and the big-box retailers may claim that U.S. consumers are the beneficiaries of lower prices, but if those consumers lose their jobs as a consequence, then how will they continue to consume? In the short term consumers may benefit from lower-priced Chinese imports, but long term prospects depend on inventing new jobs for American consumers.

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