The fixed rate of the yuan not only means that Chinese goods have not become more expensive in the U.S. market as the dollar falls. It also means that the yuan has "ridden the dollar down," giving Chinese products an even greater competitive edge in world markets than they already enjoy because of cheap labor costs. As a result, U.S. exporters like Cahill face stiff competition in Japan from the Chinese, who in recent years have started banging out American-style building supplies of high quality.
"If you're trying to go up against the Chinese on selling six-panel hemlock doors, they'll kill you all day long," Cahill said.
For Americans, a dinner in Paris or a stay in London is becoming more expensive, reflecting the rise in the euro from 86 cents in early 2002 to just below $1.35 yesterday.
(Remy De La Mauviniere -- AP)
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A Continuing Decline
With the trade deficit so stubbornly high, many economists think the dollar still has a considerable way to fall. The current situation, they contend, is not sustainable, particularly if the debts owed by Americans keep mounting as a percentage of the nation's economy.
"If we keep going, we'll hit 100 percent of GDP -- territory never visited by any large industrial country," said Michael Mussa, a former chief economist of the International Monetary Fund and a scholar with the Institute for International Economics. "At some point, the game has to end" -- as countries such as Brazil discovered when panicky foreigners began pulling money out.
The U.S. dollar's fall of about 16 percent against other major currencies should, according to a rule of thumb used by many economists, eventually trim the current $600 billion trade deficit by about one-quarter. At a recent forum sponsored by the institute, a panel of analysts concluded that the dollar would probably have to decline by an additional 15 percent to stabilize the trade gap at what they consider a reasonable level of about $300 billion a year -- reasonable because at that level, U.S. debts would stop spiraling upward as a proportion of GDP.
That analysis is not universally accepted. Bush administration officials, among others, confidently assert that foreign investors will continue to pour money into the United States because its economic fundamentals are sound. But others contend it foolhardy to dismiss the likelihood that foreigners, seeing the inevitability of the dollar's fall, will unload their U.S. holdings in a self-reinforcing panic.
"It's all too easy to generate scenarios in which the fall involves a crisis," said John Williamson, another IIE economist. The best way to minimize the risk of crisis, Williamson and many other economists argue, is to reduce the U.S. budget deficit, which would dampen consumer demand and thus curb imports relatively quickly.
And even if the dollar's decline proceeds smoothly, it would still deprive Americans of purchasing power that they would otherwise have available to buy foreign products.
"In the longer term, a weaker currency means that the United States and its citizens are poorer," Mussa said. "A weaker dollar is clearly necessary, but that doesn't mean the weaker, the better. It's like going to your boss and saying, 'Please give me a lower wage.' That's sensible if the alternative is losing your job. But it doesn't mean the lower, the better."
