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Subsidizing Foreigners’ Consumption Enriches Them As It Impoverishes You

In my latest column for AIER I use the analogy of a school fund-raising fair to help explain why a government that successfully keeps the price of its country’s currency below that currency’s market value impoverishes its own citizens as it enriches foreigners who buy that country’s exports. A slice:

If, for example, Beijing successfully arranges for Americans to purchase Chinese yuan at below-market prices, Chinese exports to America will indeed rise, and American exports to China will fall. Chinese firms that sell more to Americans will reap artificial benefits while American firms whose sales fall as a result of the undervalued yuan will suffer. (For the record, I have real doubts that Beijing succeeds in keeping the value of the yuan against the dollar artificially low. But for my purpose here I take as true the claim of many protectionists that the yuan is indeed undervalued.)

Yet despite visible gains to Chinese exporters, the Chinese people as a whole will be made poorer by an undervalued yuan. After all, to produce additional goods to ship to America requires real resources. (These goods are not crafted literally out of money.) And these real resources must come from somewhere. These come from the Chinese people who, because of the undervalued yuan, can purchase for their own use fewer goods and services than otherwise.

Also, despite visible losses of some American firms, the American people as a whole will be made richer by an undervalued yuan. After all, American buyers – final consumers as well as American firms that use Chinese imports as inputs in production – are the lucky recipients of the additional resources that Beijing’s currency policy extracts from the Chinese people.

The real costs of goods exported to Americans by the Chinese people are not lowered simply because Beijing keeps artificially low the dollar price of the tickets – yuan – that Americans use to purchase goods and services in China. Indeed, because any “successful” undervaluation of the yuan relative to the dollar artificially drains real resources out of China and into America, such undervaluation impoverishes China as it enriches America.