DON'T BLAME CHINA FOR AMERICA'S ECONOMIC ILLS

EDITOR'S NOTE: Like it did with Japan some 20 years ago, America seems to be looking East for an excuse for its own troubled economy. This time, writes PNS contributor George Koo, China and its currency, the renminbi, are the scapegoat. Koo is an international business consultant.

BY GEORGE KOO, PACIFIC NEWS SERVICE

If the recent action of members of Congress bemoaning the loss of U.S. jobs is any indication, the United States is suffering from another anxiety attack and loss of confidence. These lawmakers accused China, in particular, of sabotaging the American economy by unfairly undervaluing its currency, the renminbi, against the dollar.

Bear in mind that China first pegged its currency to the dollar almost 10 years ago. When, three years later in 1997, Asian economies suffered a flight of capital and drastic devaluation of local currencies, China was universally praised for holding fast to the peg: it refused to devalue the renminbi in order to protect its share of export trade. (Interestingly, China's exports inexorably marched on despite a stronger currency relative to its faltering neighbors.)

Since then the dollar has weakened against world's major currencies, including the renminbi. Now, suddenly, forcing China to raise the value of the renminbi is being touted as the magical cure to America's economic ills.

This is somewhat reminiscent of America's ire with Japan some 20 years ago. At the time, Japan also held a huge trade surplus and was accused of keeping its yen artificially weak relative to the dollar.

Japan acquiesced and raised the value of the yen. But that did not solve America's economic woes in the early 1980s. Detroit screamed the loudest about the "unfair" competition, but failed to recapture lost market share even as Japanese carmakers raised their prices.

Some long-forgotten member of Congress even smashed a Japanese-made VCR on the steps of Capitol Hill to great fanfare, but this contributed not a whit to solving America's economic problems.

Whereas Japan was a closed economy that discouraged foreign investment and therefore outside participation in its economic growth, China has been open to foreign direct investment and attracted more of such investment than any other nation last year.

Companies invest in China by building manufacturing facilities there. China provides a productive work force at stable wage rates; one that works hard, learns fast and makes a wage high enough to raise its living standards.

Companies that have invested in China make more money by being able to export high quality goods at reasonable prices.

American consumers benefit by being able to buy these goods at a reasonable price and thus improve their standard of living without having to deal with the chaos of escalating inflation.

It has been a winning arrangement for all.

Those who claim that China is enjoying an unfair advantage with an artificially weak renminbi have failed to explain how any currency revaluation is going to bring jobs back to the United States.

Consider the most extravagant claim: The renminbi is being artificially depressed by 40 percent. Even if the renminbi were adjusted upward by 40 percent -- from 8.28 yuan to one U.S. dollar, to 5 yuan to $1 -- the average cost advantage of the Chinese worker over the U.S. worker would drop from 20 to 1 to a "mere" 12 to 1. How much net gain in jobs for the United States will result from that?

The reason China has become the factory for the world is because companies that used to supply the U.S. market from Taiwan, Korea and Mexico have moved their production to China to remain in business. The truth is that most of those jobs have not been in the United States for decades.

Some economists point out that China buys in the global markets almost as much as it sells. China buys products for domestic consumption, and it also purchases intermediate materials that need to be converted into export products. An economically strong China is looked upon as a possible tractor to pull the world out of the economic muck.

Wringing one's hands because we have been beaten in terms of cost and productivity won't solve anything. As recent as three years ago, we were bragging about the superiority of American technology and productivity. We need to get back to that frame of mind.

Forcing the renminbi off the peg is tantamount to destabilizing China's economy. And nobody wins from a weakened Chinese economy.