Persistence of RMB/Dollar Currency Issue

Both U.S. Presidential candidates have stressed the need for China’s currency revaluation in their recent policy positions, reported earlier on CDT here.  But are their proposals economically sound?

Obama writes at AmCham:

Central to any rebalancing of our economic relationship with China must be change in its currency practices. Because it pegs its currency at an artificially low rate, China is running massive current account surpluses. This is not good for American firms and workers, not good for the world, and ultimately likely to produce inflation problems in China itself.

McCain registers in more obliquely:

China has obligations as well. Its commitment to open markets must include enforcement of international trade rules, protecting intellectual property, lowering manufacturing tariffs and fulfillment of its commitment to move to a market-determined currency.

Rebutting these concerns, Vox has reported on a different method of calculating the impact of currency revaluation on trade surplus that challenges the candidates’ positions:

[…]The share of foreign value added in Chinese manufactured exports is at about 50%… which is much lower than most other countries. This implies that a given exchange rate appreciation is likely to have a smaller effect on China’s trade surplus than for other countries. The domestic content share is particularly low in sectors that are likely to be labelled as sophisticated, such as electronic devices and telecommunication equipments. This means the competitive pressure China’s exports place on skilled workers in high-income countries is smaller than suggested by a simple-minded look at the raw trade data.

For the Heritage Foundation, Ambassador Terry Miller wrote earlier this year:

It’s true that a U.S. producer of a product that is in demand in China will normally sell more in China if the renminbi appreciates against the dollar. Similarly, a U.S. producer of goods for domestic consumption competing against Chinese imports will also normally sell more if the renminbi appreciates.

There aren’t very many such firms, however. Chinese and Americans don’t generally produce the same things. Indeed, it is through specialization, not competition, that both countries reap the benefits of trade.

For Ambassador Miller’s full article, read this.


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