Shaun Rein of the China Market Research Group submits:
This column originally appeared in Forbes
In his latest column in The New York Times Paul Krugman recommends that the US impose a 25% tariff on Chinese imports unless China appreciates the renminbi, its currency, whose principal unit is the yuan. As I've written before, the Chinese government can't risk revaluing its currency until world markets are more stable or it will risk driving Chinese exports back into a tailspin, which I estimate would result in another 5 million job losses. Far too many factories are running on the paper-thin margins that American companies like Target (TGT) and Wal-Mart (WMT) demand from their suppliers. An appreciation of the yuan would immediately put those factories out of business, just as many closed down when China appreciated the yuan 20% between 2005 and 2008.
Moreover, Krugman doesn't take into account the fact that rising labor costs are already helping fix the imbalance in the dollar-yuan exchange rate without an actual appreciation, and he fails to acknowledge that China's surplus is actually decreasing as China's domestic consumption grows. You don't have to change the exchange rate directly to make the yuan more fairly valued. Even Jim O'Neill, Goldman Sachs' chief economist, who has repeatedly criticized China's exchange rate policy, recently said that the yuan is no longer as underappreciated as it has been.