VoxEU Column Exchange Rates

The US-Sino currency dispute: Introducing a new eBook

Today Vox posts a new eBook “The US-Sino currency dispute: New insights from economics, politics, and law” that gathers 28 short essays written by 33 authors from around the world. The eBook provides the best available economic, legal, political, and geopolitical thinking on the confrontation, as well as on the causes and likely consequences of the dispute.

Thanks to deft diplomatic footwork, a US-China confrontation over the renminbi has been avoided – or at least postponed. This is a very good thing. Escalation of this conflict between the world’s two largest traders is the last thing the world economy needs. Many nations around the world are relying on rapidly recovering trade flows – both imports and exports – to get the factories back to work. And trade wars – like real ones – can be surprisingly difficult to manage once started.

But what we’ve seen is not a peace treaty – it’s a truce. The dispute has not been resolved. The US Treasury merely postponed the publication of its report on foreign currency manipulators (initially due yesterday, 15 April 2010). Moreover, that’s the US Executive Branch. Under the US Constitution, it is Congress that has the right to regulate trade. They can act at any time. With mid-term elections looming (November 2010) and unemployment high and persistent, the temptation to been seen as “doing something” is rising.

Likewise, China is surely following developments keenly. As they demonstrated last year when the US imposed tariffs on imports of tyres, the Chinese are able to react quickly to US trade policy moves.

The eBook – which gathers 28 short essays written by 33 authors from around the world – aims to provide a one-stop shop for the best available economic, legal, political, and geopolitical thinking on the confrontation, its causes, and the likely consequences.

Make no mistake – this conflict will be with us for a long time. If the previous disputes between Japan (during its rise to prominence) and the US are anything to go by, then years could go by before currency-related tensions finally abate. (See Corbett and Ito in this volume for an assessment of the lessons from the long history of US-Japanese trade disputes and their contemporary relevance for China and the US.)

Indeed, this dispute has the potential to overshadow the G20 Leaders meetings in June and November. For example, in his chapter in the eBook, Fred Bergsten calls for the "naming and shaming" of China with the stated goal of building a coalition of nations to press for renminbi appreciation.

Main findings of the study

Drawing on a wealth of economic, legal, and foreign policy expertise, the eBook’s main findings are:

China's currency is undervalued – somewhere between 2.5% and 27.5%

To determine just how much China's currency is out of line, four sets of experts were consulted about this matter. Their analyses led to two findings. First, when it comes to the measures of greatest policy relevance, all agree that the Chinese currency is undervalued. Second, and here is the difficultly, even among the measures of greatest policy relevance the estimated undervaluation is between 2.5% and 27.5%. In Chapter 10 by Cheung et al., the authors rightly note that the measures of short-term undervaluation, which are likely to be of greater policy relevance, are the ones where assumptions made by researchers are the most influential. The notion that technocrats can ride to the rescue on this controversial matter should be discarded.

So how much revaluation is enough? This question raises the concern that US-Sino disputes will likely continue, even if China starts to revalue.

Extensive outsourcing means Chinese revaluation is not in the US interest

  • A revaluation of the renminbi of only 5% will eliminate China's trade surplus with the world, according to up-to-date estimates commissioned especially for this study. Such a revaluation would improve the US trade deficit with China by $61 billion (narrowing the 2009 US trade deficit of $296 billion by about a fifth.)[1]
  • A revaluation of the renminbi by 10% would improve the US trade deficit by $111.5 billion, still not enough to eliminate the US trade deficit with China.[2] Because so many US exporters buy parts and components from China, the revaluation would raise their costs – the resulting hit to US exports would result in 424,000 US job losses.
  • Should the US impose a 10% across-the-board tariff on Chinese imports and the Chinese respond in kind (imposing a 10% tariff on all US exports), then just under a million (947,000) US jobs will be lost in this tariff war.
  • Recent calls by US legislators, Nobel Laureate Paul Krugman, and others for a Chinese revaluation threaten to increase US jobless rolls in the short run and depress wages over the medium term. Worse, at a high time of US unemployment, a tariff war with China threatens to make nearly a million US workers jobless. The jobs of workers in US export industries that rely on supply chains would be sacrificed in this dispute. Recent US proposals remind me of the adage “be careful what you wish for”.

"Nixon's Shock" won't work again

In chapter 21, I dispute recent suggestions that the Nixon Shock – in which a 10% surcharge was imposed on all imports into the US on 15 August 1971 – will work again. Even if the 1971 surcharge induced Japan and Germany to revalue their currencies, circumstances have changed over the past 40 years. China doesn't have the same defence relationship with the US, nor is the Cold War underpinning international economic cooperation. What's more, outsourcing has profoundly changed international trade flows and, as shown above, US tariffs harm US exporters; the calculus of import surcharges has fundamentally changed.

Chinese revaluation is in China's own interest.

  • Leading experts, including renowned Chinese scholars, affirm that revaluation of the renminbi is in China's own interest. Professor Yu Yongding, former President of the Chinese Academy of Social Sciences, argues "The People's Bank of China should reduce its intervention in the foreign-exchange market and allow the renminbi to appreciate, although in what way and by how much is a debatable matter. The Chinese public should realise that the renminbi appreciation is one of the indispensable elements in China's paradigm shift. The renminbi appreciation will cause some troubles for exporting enterprises but overall the benefits will be greater than the costs" (page 19).
  • According to Professor Yiping Huang of Peking University, six factors contribute to China's large current account surplus (see chapter 3). "Any policy response must therefore move beyond simply discussing currency appreciation" (page 23).
  • Harvard University's Professor Jeffrey Frankel identifies five reasons why China will benefit from currency revaluation: to counter the current overheating of the Chinese economy; to limit excessive accumulation of foreign-exchange reserves; to promote a better balance between internal and external drivers of growth; not to repeat the mistake of China's neighbours and cling to an outdated fixed exchange rate for too long; and to narrow the gap between Chinese domestic and international prices.
  • Professor Peter Schott of Yale University's School of Management examined the impact of the 2005-2008 Chinese currency appreciation on US imports from China and found that gradual appreciation did not disrupt Chinese exports. Fears that revaluation will sharply curtail exports are overdone. More likely, Schott argues, revaluation will stimulate the upgrading of Chinese export industries. He argues "…to the extent that appreciation forces low-margin, labour-intensive products out of China towards lower-cost locations like Vietnam, Chinese firms will have another incentive to move up the quality ladder and compete more directly with producers of more sophisticated goods in the US and other developed economies" (page 98). Is upgrading of Chinese exports really what US legislators want?
  • Chinese contentions that US pressure on Japan to revalue the yen led to its 20-year stagnation are rejected by Oxford University's Jenny Corbett and University of Tokyo Professor Takatoshi Ito (chapter 22). Corbett and Ito argue "Monetary policy was relaxed from 1986 to 1987, and the record-low discount rate (at that point) of 2.5% was maintained from February 1987 to May 1989, in the hope that the low interest rate would stop or moderate the speed of yen appreciation. Hence, it was not caving in to yen appreciation demands but resisting US pressure…that made monetary policy too lax and contributed to bubble enlargement. This logic is just the opposite of what Chinese officials, and those who draw strong parallels between the Japan and China, appear to be the case" (page 176).
Looking forward

The reasoning in this eBook may lead to a growing recognition within the US Congress that it has far fewer levers over China than other US trading partners and that its threats lack credibility. Perhaps this will provide a window of opportunity for a more constructive outcome; that is, the recognition that changes in other nations' policies can no longer be demanded but must be negotiated. Negotiation requires reciprocity, the identification of potential deals, and (frequently) the willingness to be bound in international accords. To be frank, to date neither the US nor China has shown much appetite for any of the latter, but at least if the endpoint is clear it might make the unilateralist dead-ends all the more obvious.

The CEPR eBook The US-Sino Currency Dispute: New Insights from Economics, Politics, and Law, edited by Simon J. Evenett, is available online at www.voxeu.org.


[1] These findings were computed by Professor Joseph Francois and are printed in the Executive Summary and Chapter 19 of the report (page 155ff). To obtain these estimates, Professor Francois used the same computational model as the Obama administration uses to estimate the impact of exports on jobs and as the US International Trade Commission.

[2] Francois estimates that a 15%  revaluation of the Chinese currency will eliminate the US trade deficit with China.


210 Reads