Would revalution of Chinese currency impact its exports?

Continuing the earlier discussion on the value of Chinese yuan, here is another article from the Wall Street Journal Asia, that finds that given the nature of Chinese exports, a 5% re-valuation would barely add 25 cents to the price of a T-shirt sold in the US. Joseph Sternberg's article, "The Irrelevant Yuan?" was published on 5 May 2010. Here are a few excerpts.

To some in Washington these days, adjusting the yuan-dollar exchange rate is the fix for all America's ills. That single number supposedly determines which jobs stay in the United States and which go to China. It dictates which and how many goods move where. It's attributed the mystical power to raise or destroy mighty economies by its movements or lack thereof.

Except that the real world doesn't work that way. Recent conversations with executives responsible for supplying clothes from Asia to American shelves suggest that the yuan case may not be as clear-cut as U.S. revaluationists would have us believe... ...

Revaluationists implicitly, and wrongly, assume that the bulk of the value of Chinese products is exposed to the exchange rate. If that were true for any industry, it would be true in apparel where yuan-denominated labor still accounts for a much higher proportion of costs than in more mechanized manufacturing. Yet it ain't quite so, as an American executive at a children's clothing retail chain recently explained. (He and the other executive in this piece asked to remain anonymous given the political sensitivity of the issue.)

This executive's largest expense is fabric, which accounts for roughly 50% of the final cost of a piece of clothing. He also figures in a profit margin of about 15%, depending on the product. That leaves 35% of his cost for labor, utilities and the like—yuan-denominated expenses. As for the fabric cost itself, about half of that (one-quarter of the cost of the finished garment) is cotton, a globally traded commodity priced in dollars. The fabric manufacturer also might take a 15% profit, leaving 35% for yuan-denominated costs.

So take a $10 pair of boy's summer shorts: $2.50 is cotton, the price of which won't change with a revaluation. Another $2.50 (perhaps) is profit. That leaves roughly $5 in Chinese labor and other yuan costs that are affected by a revaluation. Subject that portion to the 5% revaluation (that's at the upper range of current expectations for what Beijing will do) and the shorts now cost . . . $10.25.

That assumption of a surprisingly large profit margin is significant, as a chat with another American businessman makes clear. His company sells a range of brands, from high-end to low-end, and manufactures throughout Asia. When asked about the possible effects of a yuan revaluation, he first observes that his company no longer makes its cheapest products in China anyway. Rising labor costs, higher taxes on foreign businesses and the like have pushed ultra-low-price T-shirts and jeans to the likes of Vietnam or Bangladesh. What remains in China are higher-value-added, more profitable name-brand products... ...

In response to Joseph Sternberg's article, Michael Ludd, a lawyer based in Hong Kong wrote an interesting letter to the editor at WSJ.

Take a pair of jeans made in Thailand for $3.19 a pair. Shipping those jeans to the United States adds about 50 cents of cost to each pair, after accounting for freight and insurance. At brand-name stores in the U.S., a pair of those jeans sells at a retail price between $37 and $79 (plus delivery, if the purchase is made on the Internet).

The mark-up in price captures the real value added by the intellectual property of the design, advertising, distribution and financing—all services often provided by U.S. companies, in dollars. Taking the higher retail price, less manufacturing and shipping, about $75.31, or 91% of the final price is attributable to service businesses and of course profit.

The value of the yuan in this process is almost immaterial.

Misplaced concerns over Chinese currency

Last couple of years, there have been a rising demand among a section of policy makers to accuse China of keeping its currency undervalued, and thereby gaining an unfair trade advantage for its exports. A recent meeting of G-20 finance ministers and central bankers, India and Brazil too lent their voice calling for a stronger Chinese yuan. But Jagdish Bhagwati & Arvind Panagariya, two eminent Indian economists based in Columbia University, argue that "India errs by lending its voice to calls for a stronger Chinese yuan", in the Economic Times, on 3 May 2010.
Economic Times

For some time now, the US Congress and some Washington think tanks have aggressively sought to turn the bilateral exchange rate issue between the US and China into a multilateral issue. They have done this by asserting that the undervaluation of the Chinese currency hurts not just the US but Asia and others as well.

The underlying argument is based on a syllogism. The first argument is that an undervalued renminbi is the root cause of the Chinese current account surpluses and the US current account deficits. The second argument is that the export expansion so achieved by China robs countries such as Brazil and India of their export markets... ...

But neither argument is acceptable. Consider first the error in the second argument. Just because China fixes its exchange rate against the US dollar does not mean India cannot choose the value of its currency against the dollar or other currencies including the renminbi at the level it sees appropriate for itself. What happens to India’s exports and imports depends on what it does to its own exchange rate, money supply and fiscal deficits and how its savings and investment are balanced... ...

The exports-to-GDP ratio grew from a low of 11 per cent in fiscal year 1997-98 to 23.6 per cent in 2008-09 . This was a faster expansion of India’s exports than during any other 11-year period in its history. If the Chinese dollar peg during 1997-2005 had any effect on India, the movement in the rupee’s exchange rate more than neutralised it... ...

Besides, the more than 18 per cent appreciation of the renminbi vis-a-vis the dollar between 2005 and 2008 made little dent in the US current account deficit. From $631.1 billion in 2004, it rose to $748.8 billion in 2005 and $803.5 billion in 2006 before declining slightly to $626.6 billion in 2007 and $706.1 billion in 2008. Going by these numbers, the exchange rate is surely at best one of many factors explaining the US current account deficits.

The US runs a current account deficit with more than 100 countries, including very large deficits with Germany and Japan. The combined current account surpluses of Germany, Japan, Switzerland and Norway far exceed the current account surplus of China. If one believes in the primacy of the exchange rate as the explanation of current account imbalances, one would have to call for these countries also to revalue their currencies! ... ...

India also makes a major tactical error by lending its voice to the calls for the appreciation of the renminbi. With its savings rate high and rising, it too could run into the Chinese “problem” of a current account surplus. It is surely a mistake then to go down this road where shortsighted US politicians and their enablers would have us go. Politically also India makes an error by taking sides in what is essentially a China-US issue. We have enough problems with China not to want to add a gratuitous one. Will the prime minister take note?

China's records a trade deficit in March 2010

For the first time in Six year, China posted a monthly trade deficit of $7.2 billion, in March 2010. Exports totaled $112.11 billion in March, up 24.3% from a year earlier. Imports reached US$119.35 billion, up 66% compared to the same period last year, Xinhua reported. China's global trade surplus was $7.6 billion in February and the combined January-February surplus was $21.8 billion. Economists say the deficit reflected weak exports to the United States and other major markets still struggling to recover from the recession, as well as sharp rise in import of commodities. But China's minister of commerce, Chen Deming, described March's deficit as only a "blip on the radar," in the state-run newspaper China Daily. Read more in USA Today, on 11 April 2010.
Is this a blip on the radar, or is it indicative of something new?

China is the world's top exporter of goods, in 2009

The Wall Street Journal reported on Jan 6, 2010, that China is likely to export more goods than Germany in 2009.

China took over the mantle of the world's top merchandise exporter from Germany in 2009, according to the latest figures, aided by a global economic crisis that has taken a greater toll on other trading powers.

China exported $957 billion of goods in the first 10 months of 2009, compared with $917 billion for Germany, according to customs data compiled by Global Trade Information Services, a Geneva-based firm.

No changes in November or December are expected to overturn the Chinese lead, trade experts say. China is likely to publish trade figures for the full year next week.

You may find the complete article here, "China Dethrones Germany as Top Goods Exporter".