Bottom Dollar

Bottom Dollar

In the aftermath of the Great Recession, which sent U.S. import containers down more than 16 percent and global volume down more than 11 percent, there is perhaps no greater long-term issue hovering over container trade than China’s currency policy.

Efforts by the Chinese government to keep the yuan pegged at roughly 6.8 to the dollar has been a reality of the global economy for years, maintaining competitiveness of Chinese exports while exacerbating the country’s trade surplus with the U.S. and other major economies. As 2010 unfolds, however, pressure is building on China to allow its currency value to increase because, economists and trade experts say, the policy is holding back the U.S. economically while perpetuating trade imbalances that may have contributed to the depth and duration of the recession. Protectionist measures against China in sectors such as steel and tires are on the rise in the U.S. and Europe.

The extent to which China relents, or doesn’t, will have a big impact on container shipments from the world’s largest container exporter, either by maintaining the viability of China-based supply chains if the currency level is maintained or encouraging diversification and near-shoring if it’s allowed to rise.

“I think the biggest uncertainty in the global outlook this year is the Chinese currency policy,” said Walter Kemmsies, chief economist of port engineering firm Moffatt & Nichol.

But the questions of the impact of China’s currency policy on the global economy and whether a confident and empowered China would be willing to do anything about it are really two different things. China ‘s newfound power on the world stage is embodied in its ability to resist pressure on its currency. Yet the likelihood that the yuan’s value would increase substantially if allowed to float freely against other currencies appears beyond dispute.

“There is something of a consensus among economists that the Chinese currency is undervalued. Martin Feldstein, Paul Volcker, Ben Bernanke and Paul Krugman all have made comments to this effect. I don’t think it is much of a question any more as to the fact that it is undervalued,” said Thomas J. Duesterberg, president and CEO of Manufacturers Alliance/MAPI.

A potential shift in that valuation also would trigger a sea change in how the impact of the Chinese currency on the U.S. is viewed. During much of the last decade-and-a-half, economists and supply chain experts viewed the shift of manufacturing to China largely in a positive way. It kept inflation low, improved standards of living by expanding consumer choice and propelled emerging industries such as logistics.

Less appreciated were the long-term negative effects, such as the reduction in U.S. manufacturing employment and the impact of China’s need to purchase U.S. securities to keep its exchange rate low relative to the dollar, in the process supplanting Japan as the largest foreign holder of Treasuries.

The Chinese demand for Treasuries, Kemmsies said, helped keep U.S. interest rates low, which in turn helped fuel the mortgage boom and, by extension, the boom in imports of household goods. This contributed to the packaging of mortgages into securities to be sold to pension funds, insurance companies and other institutions for which Treasury yields had become unacceptably low, exacerbating the financial crisis.

Now, with unemployment the largest factor holding back the U.S. economy, Krugman wrote in The New York Times on Jan. 1 that continuation of China’s currency policy will cost the U.S. some 1.4 million jobs in coming years. “If China does not allow its currency to reach a market-set level, rather than a policy-set level, this creates a disincentive for companies to expand capacity in the U.S.,” Kemmsies said.

Some believe that although China one day may choose to adjust its currency, that’s unlikely to happen this year. China has simply become too powerful, and the country’s leaders gave no suggestion in last fall’s meetings with President Obama that U.S. interests would play much of a role in currency policy.

Unlike the results of the so-called Plaza Accords in the mid-1980s, when a dominant U.S. was able to convince other free-market nations to allow the dollar to fall relative to Japan’s yen and the deutsche mark, helping the U.S. emerge from recession, no global consensus exists today potent enough to pressure the Chinese.

“The Chinese have had success both in real terms and in terms of international public opinion that their stimulus has worked — they recovered faster than we did and the Europeans did — and it is going to take them a long time to change their model,” Duesterberg said.

China’s stimulus spending, for example, may have expanded its excess manufacturing capacity and in the absence of a vibrant domestic consumer economy, there will be continued pressure to generate exports to maintain growth.

“It is probably going to take years for this rhetoric we see in the U.S., increasingly in Europe and in India to have any impact on the Chinese,” Duesterberg said.

Don’t bet your last dollar, in other words, that supply chains built in China will change very soon.

Peter Tirschwell is senior vice president for strategy at UBM Global Trade. Contact him at