Exchange Rates and the Trade Deficit
Chinese President Hu Jintao recently visited the U.S. to a rather mixed reception. Turning on the news at any point during his visit invariably inundated one’s ears with indignant accusations of how the Chinese exchange rate manipulations are causing our trade deficit. That, as my father would say is a bunch of hooey, and grossly over- simplifies the situation. The trade deficit is the result of Americans as a whole consuming more than we produce. Where we buy from, now that is significantly impacted by exchange rates. 
The dollar/yuan exchange rate makes goods from China relatively less expensive than goods from other countries. If the Chinese increase the price of the yuan relative to the dollar, their goods become more expensive to Americans. We would have three choices, (1) cut back on our consumptions of these goods, (2) find another country from which to buy them or (3) produce them at home. In 2009 the five largest Chinese import categories, (according to the Office of the United States Trade Representative) were (1) electrical machinery, (2) machinery, (3) toys and sports equipment, (4) furniture and bedding, and (5) footwear. Would it really help to make these items more expensive for Americans? Might we find another country from whom we could import at only a slightly higher cost than China pre-currency appreciation, rather than develop manufacturing capacity for these goods at home? On top of that, every story has another side. In 2009 China was the United States’ largest supplier of goods imports, but China was the 3rd largest export market for the U.S. If the dollar rises relative to the yuan, it would harm our exports to China as they would become more expensive for the Chinese. Is that going to help improve our economy? If we take it one step further, if the yuan appreciates, that will affect other nations that import from them as well. Bottom Line: There are no easy solutions, and good bit of what we hear in the news is hyperbole representing only a portion of the facts. Shocking isn’t it!? Prudent investing requires independent quantitative review and analysis, and a deeper appreciation of global economics than is presented on the evening news. A healthy sense of humor doesn’t hurt either!
