Strong currency is a good thing
This whole currency manipulation debate leaves me scratching my head and wondering who is the greater fool here: the Chinese government or the American congressmen. Where did they get the idea that China ever benefits from cheap currency in the first place?
Let us consider any typical product that China exports to America. Let it be, say, the patriotic star-and-stripes China-made American flags on the shelves of Walmart. Suppose, for simplicity's sake, that these flags sell for $1 apiece. What is the cost structure of these flags?
Naturally, 50 cents out of this dollar will go to Walmart, Inc for its intangible "retail services". Then 20 cents will go to the wholesaler company that sold these flags to Walmart. Then another 20 cents will go to the producer company - a Seattle-based office that "produces" American flags by ordering them from a Chinese factory. The Chinese factory owner will then receive the remaining 10 cents. After paying 5 cents to the row materials supplier - A Korean textile company that made the cloth for the flags, and a Brazilian lumber company that supplied the wood for the sticks, the factory owner pays 2 cents in factory maintenance costs, 1 cent to the government, 1 cent to the workers, and takes 1 cent as his profit.
Suppose now that China has revalued its currency by a whopping 100%. Whatever Chinese land, labor and capital could be had for 1 cent before, will now cost a whopping 2 cents. In this brave new world, the factory owner can no longer afford to ship his American flags to Seattle for 10 cents apiece. His new cost structure requires that he must pay 4 cents in factory maintenance costs, 2 cents to the government, 2 cents to his workers, and finally, he now also wants a whopping 2 cents as a reward for his entrepreneurship talents. And of course, he must still pay 5 American cents to his Korean and Brazilian suppliers. So the American "manufacturer" company now receives a new invoice for 15 cents per flag. There has been a 5 cent price increase as far as the American company is concerned. As one could expect, the "manufacturer" refuses to swallow this expense and passes it to his wholesaler customer. But the wholesaler also refuses to swallow the 5 cent increase in costs and passes it to Walmart. But Walmart also refuses to swallow the increase and passes it to the customers. And now, as a result of this dramatic 100% currency move, the American patriots shopping for cheap flags see a new price tag of $1.05. There is no doubt among the economists that this intolerably high price is going to undermine the export of stars-and-stripes to America by forcing consumers to switch to a higher-quality German variant priced competitively at $5 a flag.
This is just not going to happen. At the current price point, the elasticity of demand for China-made American flags, drywall, and lead-painted toys is essentially zero. The volume of trade with China is simply not a function of yuan exchange rate vs. the greenback. It is entirely determined by the ability of Americans to pay for the hmm...well,...speculating...sorry, I was going to say, importation, logistics, merchandising, distribution, storage, tracking, promotion, market research, wholesale and retail services offered by the American "businesses" that do business with China.
Which means that China has nothing to fear from currency revaluation.
Except of course that when they look at their 2 trillion dollars invested in Treasuries, they will have to wonder why the hell they ever bought that junk that now won't even buy them much land, labor, and capital in China proper. Someone will have to lose face...