Economics 101

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bmwhype

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China�s rising labor costs and strengthening currency are making automakers leery of becoming too dependent on China for parts that can be shipped.

What is the impact on American goods when the Chinese currency increases?
 
... "becoming too dependent on China for parts that can be shipped."

= as the Chinese currency appreciates, one US dollar can buy less and less, hence the cost of building a car domestically with parts from China will go up. The impact on American goods is that the cost of manufacturing goods with imported Chinese parts will increase.
 
Which suggests that more of the production of the final good (rather than just parts) might be done outside the US... Thus US producers won't be as dependent on chinese low cost advantage.. just US consumers...
 
bchadwick wrote: "Which suggests that more of the production of the final good (rather than just parts) might be done outside the US... Thus US producers won't be as dependent on chinese low cost advantage.. just US consumers..."


I'm not sure I follow this logic. Care to explain?
 
If getting parts from China is getting more expensive, and so assembling cars in the US is getting more expensive, then it starts to make more sense to push more of the car assembly into low-wage countries like China and just import the whole car. US-based businesses can still cash in on the price/wage differential. US consumers may still get cheaper cars, but they will be more dependent on changes in Chinese currency and wage rates.
 
So by increasing the cost of Chinese Auto Goods, you increase their demand... hmmm....

Perhaps we have finally found a Giffen good?!?!?


Ok, facetiousness aside, I don�t buy that argument:

Your first part is correct: "If getting parts from China is getting more expensive, and so assembling cars in the US is getting more expensive".

But:

1) If we assume that Chinese Auto parts only make up 10% of the cost of the car, and the currency strengthens by 10%, then the cost of the US-built car will increase by 1%.

3) If the whole car is built in China and sold to a US consumer then the cost has gone up by 10%.

So your conclusion that "it starts to make more sense to push more of the car assembly into low-wage countries like China" doesn't make sense to me based on currency movements alone. Infact quite the opposite.
 
Well, Deadcat, that would mean the wages in China are not "sticky" and proportionally goes up 10%.
 
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