China's deflating yuan means more Chinese imports and lower prices, the exact opposite of Donald Trump wants. But Trump is wrong, and here's why.
WASHINGTON, Aug. 12, 2015 — Donald Trump, who is now leading in the polls for the Republican presidential nomination, says that if he is elected president he will bring back the jobs that have been lost to Chinese manufacturers. He also asks why Ford would build a multi-billion manufacturing plant in Mexico rather than in the U.S. He says he will get companies like Ford to manufacture in the U.S.
The reality is that he can’t do that and, more important, the majority of Americans won’t want him to.
Of the 148 million Americans employed today, 12 million, about 8 percent, are directly employed in the manufacturing sector. The average manufacturing worker earns $78,000 per year, where the average worker in other industries earns $63,000. These manufacturing workers are the most productive in the world, especially considering the large amount of capital goods a worker uses in the production process.
Trump complains that the Chinese have kept the value of their currency, the yuan, at low levels so that Chinese goods are much cheaper to produce. And he is correct. He wants to change that by forcing China to value its currency closer to the market levels that would prevail if the Chinese government did not regulate the exchange rates.
If that happened, Chinese goods would be more expensive, which, as Trump correctly says, will enable U.S. manufacturers to more closely compete. Trump believes that would result in more products being made in the U.S. and would create U.S. manufacturing jobs.
All of that makes sense, but the majority of Americans will not support this. Why?
Reach into your pocket and pull out your smartphone. It probably cost about $600 or less, if you bought it with a phone plan. At that price, especially when combined with the monthly payment plans that the major carriers offer, about two thirds of Americans are able to afford to buy one.
It has been estimated that if the phone and all of the components were produced in the U.S., the cost would be $1,800; only the wealthy would be able to afford one.
Pushing up the value of the Chinese currency would push up the price of goods manufactured in China. Trump hopes the price would go up enough to let American companies match the price; thus more products would be made in the US. The problem is that American consumers would have to pay more in order to support American manufacturing jobs. All consumers would suffer.
An American who pays $600 for a smartphone rather than $1,800 has $1,200 left to spend on other goods. That raises the standard of living.
Ford built that plant in Mexico for similar reasons. Although the plant is highly automated, the labor needed earns significantly lower wages. In addition, the plant will cost hundreds of millions less to build because of lower-cost construction workers and because the environmental laws in Mexico are not nearly as strict as they are in the U.S. Manufacturing in Mexico reduces the costs by thousands of dollars per car.
According to some economists, as economies mature they go through a natural process. The vast majority of people in undeveloped countries are employed in the agriculture industry. As the economy develops, production shifts from agriculture to manufacturing, usually with assembly first, then manufacturing of components, then manufacturing of high technology products.
The third phase is that the economy shifts out of manufacturing and toward providing services that require higher skilled labor. The U.S. economy is in the process of shifting from primarily a goods producer to a service provider. Already about 70 percent of GDP comes from the service sector.
If China wants to sell us goods at lower prices — which is what happens when they devalue their currency — we should welcome it. While there are negatives, especially if the devaluation is undertaken because the Chinese government wants to reverse a slowing economy — the case today — the positives for the vast majority of consumers outweigh the negatives.
Bringing low-skilled manufacturing jobs back to the U.S. may help a small percent of the population, but the vast majority will be harmed. Besides we don’t want to encourage our children to take jobs that will not be here in the future.Click here for reuse options!
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