Washington Attention Kmart and Wal-Mart shoppers: The prices you pay for sneakers, sweat shirts, toys and thousands of other items made in China are likely to be rising soon.
That's thanks to China's announcement Thursday that it is revaluing its currency. More uncertain is whether the small revaluation will make a noticeable dent in America's huge trade deficit with China.
The Bush administration, facing political pressure because of a record $162 billion deficit with China, hailed the announcement as a victory. Officials from President Bush on down have pressed China to stop linking the value of its currency, the yuan, at a fixed rate to the U.S. dollar.
"This is a very positive development. It clearly puts China on the right path," said Treasury Secretary John Snow.
Federal Reserve Chairman Alan Greenspan called the action a "good start," while the finance ministers and central bank presidents of the Group of Seven major industrial countries issued a joint statement praising the move that they said "will contribute toward global growth and stability."
U.S. business groups generally praised the action with John Engler, president of the National Association of Manufacturers, saying it had the potential "for beginning to correct the huge trade imbalances that have been created by distorted currencies."
Not all praise
But union groups were not impressed. Richard Trumka, secretary-treasurer of the AFL-CIO, said "a 2 percent revaluation doesn't mean much when the yuan is undervalued by 40 percent or more."
Some economists worried that China may have unleashed economic forces that will eventually worsen inflation in the United States by making imports not just from China but all of Asia more expensive for Americans.
Toy prices, interest rates
The biggest initial impact on consumers may come in toy prices, because about 75 percent of toys sold in the United States come from China.
There also is concern that interest rates will be rising, too, as the Chinese curb the massive purchases of U.S. Treasury bonds they have been making as part of their campaign to keep the yuan fixed in value against the dollar.
Still, most analysts argued that the overall impact on the U.S. and world economies will be extremely positive by trimming America's huge deficits, which pose a threat to global financial stability.
A rising value of the yuan in relationship to the dollar is expected to eventually stabilize and then begin lowering the U.S. trade deficit and boost the fortunes of beleaguered American manufacturers, who have lost 3 million jobs since mid-2000.
"The winner in all of this will be American businesses and ultimately U.S. workers. It is now more likely that a person working in a U.S. factory today will still be working in that factory five years from now because American products will be more competitive," said Mark Zandi, chief economist at Economy.com, a forecasting firm.
In its announcement, China said it would revalue its currency so that it will take 8.11 yuan to purchase one dollar instead of the 8.277 yuan it has taken over the past decade. That had the immediate effect of revaluing the yuan by 2.1 percent.
China also said it would switch from linking the yuan to the dollar and instead link it to a marketbasket of unspecified currencies. Beginning Friday, the yuan will be allowed to change in value within a 0.3 percent band each day.
An undervalued yuan has made Chinese products cheaper in U.S. markets and American products more expensive in China. American companies contend the yuan is undervalued by as much as 40 percent against the dollar. U.S. automakers estimate a midsize American-made car costs Chinese consumers $2,000 more because of the undervalued currency.
Administration officials say that as American products become cheaper in China, U.S. exports will increase and rising prices for Chinese goods will cause Americans to eventually curb their own purchases. Another significant boost will come when other Asian countries such as Japan, South Korea, Taiwan and Malaysia let their currencies rise against the dollar, no longer fearful of losing competitive ground to China.