They Want Dollars

A colleague told me something interesting about a business trip to China in the 1980s. The Chinese had two types of yuan, he said.

Columns From: 2/1/2006 Modern Machine Shop, ,

A colleague told me something interesting about a business trip to China in the 1980s. The Chinese had two types of yuan, he said. Locals used currency that could only buy local goods, but foreigners received yuan that could purchase imported goods in special “friendship” stores. Officially, the exchange rate between the two yuans was 1:1. Unofficially, my colleague was offered a premium of 6:1 for the currency that could buy imports.

Today, this distinction between separate currencies is gone. Or is it?

A recent magazine article about China (Harper’s, December 2005) included an interesting profile of a Chinese factory laborer. He made 1,000 yuan per month. This income was enough to let him support himself and save about half of his earnings. At that rate of savings, he expected to have enough saved to build a small house in less than 4 years. However, if that same laborer was to purchase just one Coca-Cola per day, then his rate of savings would be cut in half.

The point is this: A wage that is meager when translated into U.S. dollars can actually go quite far within the context of the local economy. It is only when that wage is used to purchase imports valued in currencies such as dollars that the wage becomes small. In essence, the Chinese (and others, too) are willing to pay a premium to convert into a currency that is more freely accepted when it comes to buying international goods.

Much is said about the state of U.S. manufacturing. We don’t take manufacturing seriously in our education, culture or public policy. We force employers to pay overhead for employees, which has the effect of making the employees themselves less globally competitive. And on top of this (to quote the title of the book by Thomas Friedman), “the world is flat.” That is, international trade flows more freely today. All of this is true. However, all of this also fails to tell the whole story.

When it comes to global currency flows, the world is skewed. Specifically, much of the world wants U.S. dollars. The United States issues the currency with which the world does business. A country wanting to develop aggressively needs products, services and raw materials from other countries, and that means it needs dollars with which to purchase them. Thus, our so-called trade deficit could be seen another way: we are exporting the strong currency we have developed.

This demand for dollars helps make labor in China and various other countries so cheap. And unless we impale ourselves by deliberately harming our currency, the demand is likely to continue. The reason for this demand has to do with development, but it also has to do with the root cause of that development: hope.

The greatest migration in human history is underway. In quantities of tens of millions per year, rural Chinese are leaving poverty for the chance of a more decent life in the Chinese cities, more than 100 of which already have populations exceeding 1 million. Today, 65 percent of China’s population lives in the country. In just 25 years, says the United Nations, almost that same percentage will live in the cities.

The competition from cheap labor that we perceive is a part of this much larger trend. The hope drives people not just to work cheaply, but also to pay a dear price for a currency that is accepted widely enough to buy the kind of development that can accommodate so many hopeful people. Seen this way, the competition to which U.S. manufacturers are adapting, and will continue to adapt to, is not part of a story of decline. It is part of a story of worldwide optimism, and a story of American strength.

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