The economic news was abuzz recently with the announcement that China will allow its currency, the yuan, to float.
I won’t pretend to fully understand money supply and currency manipulation, but the basic idea is this: rather than having the yuan always worth the same number of dollars, the two currencies will rise and fall independently. For a decade, the yuan appreciated slightly but was kept to a little over eight per dollar. China officially stopped this “pegging” to the dollar back in 2005 and started doing it unofficially again in 2008, after the value rose to less than seven per dollar.
We care because China buys an awful lot of U.S. debt, and we buy an awful lot of goods made in China.
If the yuan, as it has whenever it’s been un-pegged in the past, grows more valuable in comparison with the dollar, then our gadgetry is poised for a price bump. Don’t panic yet, though — even healthy appreciation of the yuan won’t break our technology addiction.
Take the iPad as an example. Research firm iSuppli reported in April that each $500 iPad costs $260 to build. Much of that cost is incurred, yep, in China: parts manufacturing and labor to put it together. There are plenty of costs not included there, not the least being the considerable development that went into the thing, as well as transport to our shores, marketing, technical support, yada yada.
If the Chinese currency goes up 5 percent, and even if that affects the entire $260 hardware cost, you’re still looking at just north of a 2.5-percent increase in price. Considering that final assembly labor itself is more like 3 percent of an iPad’s cost (rather than more than half for the hardware as a whole), if individual components come from outside China, this will affect prices even less.
In fact, one Foxconn plant in Shenzen, where many Apple products are made and poor working conditions apparently prompted several suicides this spring, is increasing salaries by a whopping 20 percent. Apple is subsidizing most of that increase, yet the net impact to the iPad’s retail price is nothing, nada, zippo. They’re eating the increase because it’s relatively small. So as important as Chinese labor is for all the consumer goods we enjoy, their financial reward isn’t exactly handsome by our standards.
With the fast pace of technological development, a slowly increasing yuan will barely even dent the getting-more-for-less curve we’ve come to expect as new products outstrip their predecessors in features and speed after a few meager months on the market. The upgrade cycle might get a tiny, temporary respite, but we’ll barely even notice once the Playstation 5 or 6 is out.
And all this, of course, is just one small part of a larger relationship between two countries and between them and the rest of the world. Whether a stronger or weaker yuan would be good or bad for the U.S. is a matter of considerable debate, but most economists agree that a floating currency is better than a manipulated one, because it allows prices to reflect true value. If we end up paying a few bucks more for flat-screen TVs, we can probably handle it.