AKRON—Class, pay attention. The professor now will explain why exchange rates—specifically those involving Chinese currency—matter.
The professor is Dennis Byrne, actually professor emeritus in economics from the University of Akron. He was one of the speakers at the ITEC conference and exhibition in Cleveland recently, giving his views on the extremely broad topic of the economy, international trade and the tire industry.
I've heard Byrne speak before, and he knows his stuff. I liked his very clear-cut explanation of the China yuan vs. the dollar, so here's a brief summary.
Byrne said suppose in two countries a certain tire can be produced for $50. It's exactly the same tire, and the exchange rate is one-to-one.
So what if Country A—let's call it China—can either reduce or keep its currency value low. “All of a sudden $1 buys two units of Chinese currency,” Bryne said. “What that means is the $50 tire in China now sells for $25 in the U.S., and the $50 tire in the U.S. now sells for $100 in China.”
Byrne said it doesn't take a genius to figure out the result of that situation.
The outcome is fewer tires made in Country B—we're talking about the U.S.—causing cuts in production and sending tire workers to the unemployment office.
The professor said that while the Chinese yuan definitely is undervalued, the powers that be in China really are letting it rise, but ever-so slowly. “We don't want to cause disruption” by a rapid rise to realistic valuation, the Chinese authorities say.
“And of course they don't,” Bryne said, because that would cause manufacturing to slow and unemployment to rise.
Byrne said China has massive trade imbalances because the government is subsidizing every tire that is exported. “It just doesn't show up in the books,” he said.
Never fear, though. Byrne believes this is the “Chinese decade,” similar to the days when Japan was an economic powerhouse invading the U.S.
“Japan is now stagnant,” Byrne said. Like other economists, he believes China's economy can't sustain 10-percent growth forever, and some systemic troubles, such as the environment, social problems and skilled labor shortfall, ultimately will burst the economic bubble.
We just might have to wait 15 years for that to happen, Byrne said.
So don't hold your breath.
Noga is the editor of Rubber & Plastics News.