Low Prices?! Save Us!

by Don Boudreaux on March 3, 2010

in Monetary Policy, Myths and Fallacies, Trade

Here’s a letter that I sent to ForeignPolicy.com:

Philip Levy reviews what he presents as an exhaustive list of Uncle Sam’s options for dealing with China’s allegedly undervalued currency (“Is It Time to Ding Beijing? March 3).  But, in fact, the list isn’t complete, for it doesn’t include the best option: do nothing.

“How silly!” some will snicker.  Bear with me.

Suppose that Beijing, rather than spending resources on keeping the yuan undervalued, instead spends these resources building throughout China vast systems of world-class highways, airports, and harbors.  Further suppose (which is not at all far-fetched) that the resulting reduction in transportation costs – by making China’s internal markets more efficient and by lowering the costs of transporting goods to and from China – allows Americans to buy imports from China at the same low prices that today are supposedly the result of an undervalued yuan.

Would Mr. Levy worry?  Would he, and others, ponder what to do about this situation?  If not, why worry if the yuan is undervalued?

Sincerely,
Donald J. Boudreaux

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