Weak Dollar Favors Investments In Chinese Manufacturing Plants
Depreciation of the U.S. dollar against the Korean won and the Taiwanese dollar raises the price in dollar terms of these countries' technology exports to the United States, all other things being equal. But the dollar price of Chinese-produced technology exports is unaffected by currency changes because the Chinese keep their currency, the yuan, fixed in value against the U.S. dollar.
As a result, Chinese products would become more competitive in the U.S. market against their Korean and Taiwanese counterparts. This could boost Chinese technology exports to the United States while lowering Taiwanese and Korean exports.
Exporters in Taiwan and Korea would be put in a bind in the short term; either they would be forced to lower their prices, which would squeeze revenue and profits, or they could try to make up the loss of exports to the United States by boosting sales to other countries.
In the longer run, Taiwanese and Korean exporters could accelerate the shifting of production facilities out of their own countries and into China. The currency changes described above would lower the cost to Taiwanese and Korean technology companies of building production facilities in China.
More importantly, because goods produced in China are priced in Chinese yuan, countries that locate production facilities there would avoid the adverse impact of currency changes on the dollar price of technology products for export to the United States.
While benefiting Asian countries, this scenario would not play well in the United States. Shifting production and export facilities into China would further increase the skyrocketing U.S. trade deficit with China. Because China is resisting pressure to change its exchange rate policies, this could increase the risk of actions by U.S. policy makers to curb imports from China, raising the threat of an all-out trade war. Vendors and solution providers in the United States could face supply disruptions and higher prices as a result.