May 22, 2005

So What Happens if ...

QUICK QUESTION: what happens if China revalues the yuan, or the U.S. takes action (e.g., a blanket tariff) which for all intents and purposes serves as a revaluation?

I was just thinking about this today, that's all. But it's interesting and worrisome all at the same time. For instance, what would happen to Wal-Mart? Sure, it could shift some of its supply network to lower-cost locales, but it couldn't shift all of it that quickly, could it? I mean, Wal-Mart spending alone accounts for 1 pc of China's GDP.

And would what happen elsewhere in the U.S.? I mean, if we assume the yuan is about 40 pc undervalued -- it's trading at about eight to one -- we can then assume that a fair value is five to one. Suddenly, all those Chinese goods we've been buying -- from Wal-Mart and everywhere else -- are going to get a lot more expensive awfully quickly.

Which leads to the next question: what would happen in China? If all the big multinationals keep looking for lower costs elsewhere -- and places with those do exist -- then what would that shift elsewhere mean to the world's second-most powerful nation?

I find these questions very disquieting.

Posted by Benjamin Kepple at May 22, 2005 09:14 PM | TrackBack

It will all work out for the better after some inevitable short term issues. The whole basis for economics is that supply and demand leads to adjustments and changing prices in order to clear the market and keep it in balance. When the medium for the exchange is artificially regulated, as is the yuan, the whole fundamental basis for rational economic trade is missing. That may be tolerable for a small, poor nation, but you can't have that with an economy the size of China's today.

Posted by: Swammi in Solon at May 23, 2005 08:23 AM