How do we understand how the value of the Yuan impacts our future? Especially if we live in France, India, Ecuador, Cambodia, Mongolia, or the United States? It is complex, with many variables, this matter of foreign currency exchange, economic development and world competition.
But it is time for a condensed simplified analysis, that we can share with our politicians, so that they can understand and contribute to out economic salvation.
- China has 1.4 BILLION people. By United Nations accounts, about 800,000,000 of them live on $3 a day, or less. It is the world's largest cheap labor pool.
- China has the largest army in the world. To keep them active, China actively requires that they work in industry, thus another several million people enter into the cheap labor pool.
- For China to succeed, it must sell goods at prices far below anyone else in the world.
It does that by two means.
- a. Exploitation of the world's largest labor pool.
- b. China refuses to allow it's currency (the YUAN) to decline below a fixed rate with the dollar.
As China has become a dominant economy, economic theory suggests that the Chinese Yuan would increase in value. But China doesn't allow that to happen. Why? Because if it's currency increases in value, then all Chinese goods become more expensive to the rest of the world. Therefore, China strictly controls it's currency...keeping it locked with the dollar. As the dollar declines (and it has gone down 40% over the past 3 years, due to deficits and poor economic management), normally the United States would be able to sell it's goods to other countries at a cheaper price. That would increase exports and make imports more costly. But since the USA is China's most important trading market, China has let it's YUAN decline with the dollar. Thus, China continues to have a huge economic advantage over the rest of the world.
It is making it difficult for businesses, in every nation on earth to compete, or even survive. The New York Times just published an article about Richard Wilkey, who owns a Wisconsin company that makes lawn mower blades. Wilkey is seeing his company slowly strangled, because he simply can't manufacture his goods as cheaply, or sell them as cheaply, as Chinese competitors. He, like millions of American, French, German, Ecuacorian, British, Mongolian, Mexican, Canadian businessmen, is watching as his business slowly dwindles away....while China gradually absorbs business from throughout the world. China is becoming a frightening world economic giant.
Recently, in Ecuador, I visited Juan Malo's leather company. He makes leather jackets, brief cases, purses in the tradition that has been profitable for Ecuador for generations. He told me, "We can't compete with the Chinese. A leather jacket that we make and sell for $70, the Chinese will make and sell for $40 Their's isn't as good as ours, but theirs is what sells." Jobs in Ecuador, are disappearing because of this huge problem. Ecuador can't let it's currency decline, because it is locked to the U.S. dollar....so it has lost the ability, the tool of currency valuation, to impact it's economy. It has lost a tool to survive, or try to allow people like Juan Malo to compete in the global economy.
This senario is being repeated all over the world. Nation's like Mongolia and Ecuador could easily impliment policies to base their currency valuations on a blended formula, that would be both stable, and allow more flexibility, but it is sometimes hard to make the politicians understand.
China's labor pool, as it gradually becomes educated, will also gradually require higher wages. China will then begin to lose that competitive advantage. And nations around the world are pressuring China to "unleash" it's currency, in a desperate gasp for relief, but China is making only tiny changes. The Chinese in July, allowed their currency to rise 2% against the dollar. Many are angry and many more, as they learn what is happening to their wealth and livlihoods are beginning to speak out. Sandra Westlund-Deenihan owns a company called Quality Foat Works Inc., in Schaumberg, Illinois. She said: "I do not want to bow to China in my lifetime, I do not want to see them taking over in every area of manufacturing."
Governments must be aware of what is happening. They must try to find ways to protect their industries and companies. Whether through enforcement of strict quality guidelines (China's knock offs are of terrible quality), human rights laws (China is notorious for abusing it's workers in terrible working conditions), protection of patents, copyrights (China is the World's leader in illegal knock offs), or in outright tarrif protection. Governments also must understand how to take control of their currencies and their central banks, and use them for their economy. And governments must provide liberal tax incentives to encourage local companies and businesses to hire and keep going, in spite of global competition.
Mongolia, Listen! Ecuador, Listen! Nepal, Listen! India, Listen. United States, Listen. I'm giving words that can save you....before that giant sucking noise from the east consumes you and your way of life.
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