Mendoza School of Business

Cost of China ‘s wares may soon rise

Published: July 22, 2005 / Author: Mendoza College

WASHINGTON (AP) — Attention Kmart and Wal-Mart shoppers: The prices you pay for sneakers, sweat shirts, toys and thousands of other items made in China are likely to be rising soon.

That’s thanks to China’s announcement on Thursday that it is revaluing its currency.

More uncertain is whether the small revaluation will make a noticeable dent in America’s huge trade deficit with China, and what the decision means for area manufacturers who export their products around the globe.

The Bush administration, facing political pressure because of a record $162 billion deficit with China, hailed the announcement as a victory. Officials from President Bush on down have pressed China to stop linking the value of its currency, the yuan, at a fixed rate to the U.S. dollar.

But some economists worry that China may have unleashed economic forces that will eventually worsen inflation in the United States by making imports not just from China but all of Asia more expensive for Americans.

The biggest initial impact on consumers may come in toy prices, since about 75 percent of toys sold in the United States come from China.

There also is concern that interest rates will be rising, too.

Still, most analysts argued that the overall impact on the U.S. and world economies will be extremely positive by trimming America’s huge deficits, which pose a threat to global financial stability.

China’s decision is also a boon for local manufacturers complaining about lost business overseas, University of Notre Dame finance professor Jeffrey Bergstrand said.

“Over the next decade, it’ll have a positive impact on the economy,” Bergstrand said. “By itself, it’s still too early to see how much it will rise on an annual basis.

“But it could add a couple tenths of a percent of growth to the local economy and more to the wider U.S. economy over the next decade.”

A rising value of the yuan in relationship to the dollar is expected to eventually stabilize and then begin lowering the U.S. trade deficit and boost the fortunes of beleaguered American manufacturers, who have lost 3 million jobs since mid-2000.

“The winner in all of this will be American businesses and ultimately U.S. workers. It is now more likely that a person working in a U.S. factory today will still be working in that factory five years from now because American products will be more competitive,” said Mark Zandi, chief economist at, a forecasting firm.

In its announcement, China said it would revalue its currency so that it will take 8.11 yuan to purchase one dollar instead of the 8.277 yuan it has taken over the past decade. That had the immediate effect of revaluing the yuan by 2.1 percent.

China also said it would switch from linking the yuan to the dollar and instead link it to a market-basket of unspecified currencies. Beginning today, the yuan will be allowed to change in value within a 0.3 percent band each day.

An undervalued yuan has made Chinese products cheaper in U.S. markets and American products more expensive in China. American companies contend the yuan is undervalued by as much as 40 percent against the dollar.



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