What these data demonstrate is that U.S. companies are not just looking for cheap labor. If that were the case, the last place they would invest would be Europe, where many workers make more than their American counterparts. According to the Bureau of Labor Statistics, manufacturing labor costs are 17 percent higher in Germany than here. In those cases where labor costs are lower, the magnitude is small. Generally speaking, foreign investment is driven more by a desire to gain access to markets than a desire to cut production costs.
Another point worth noting about the Chinese trade surplus is that China sends much of it right back to us by buying U.S. Treasury securities. At the end of June, China owned $122 billion of such securities -- an increase of $55 billion in the last three years. China is now the third largest foreign holder of Treasury bonds and will probably be the second by year's end. (Japan is far and away the largest at $442 billion -- something else worth thinking about.) In effect, our trade deficit with China is helping finance our budget deficit, keeping interest rates here lower than they otherwise would be.
Nevertheless, there are many who believe that China is practicing de facto protectionism by manipulating its exchange rate. If a nation's exchange rate is undervalued, it will tend to make its exports cheaper in terms of foreign currencies and imports more expensive, thereby stimulating exports and hindering imports. Some experts believe that the Chinese government is holding the yuan (the Chinese currency) as much as 40 percent below what its free-market value would be.
The problem with this logic is that the yuan is pegged to the dollar and has been for some years. It goes up and down as the value of the dollar does. In the view of most economists, such as Stephen Roach of Morgan Stanley, China is not competing on the basis of an undervalued currency but "mainly in terms of labor costs, technology, quality control, infrastructure and an unwavering commitment to reform."
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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