The Wall Street Journal yesterday had a great article which singlehandledly exposes the silliness of currency hawks' argument that threatening China with retaliatory tariffs will somehow "pressure" the Chinese into appreciating the Yuan (and, of course, magically saving the US economy).
The United States said Friday that China's currency remains "significantly undervalued" but Beijing's policy was not manipulating the yuan to gain an unfair trade advantage.The US Treasury Department said it had concluded that China had not met the standards for manipulation but would continue to closely monitor the pace of appreciation of the yuan, or renminbi.
The Chinese yuan continued its decline against the dollar, hitting 6.1259 yuan for a dollar on Wednesday. The People's Bank of China (PBoC) fixed the yuan at 6.1192 per dollar, according to the China Foreign Exchange Trading System.
Over the last year or so I've often screamed calmly noted that the unbiased, non-partisan folks at the Congressional Research Service (CRS) have repeatedly examined the US-China currency issue and have repeatedly found that significant appreciation of the RMB will have little effect on the US-China trade balance or overall US economic welfare.
With everyone once again screaming and yelling about China's currency policies, it's another good time to take a deep breath and look at what's actually happening in global trade and currency markets to test whether any of the policies being proposed actually has any grounds in, you know, reality.
Newly developed indicators suggest eroding international competitiveness.
The standard measure of competitiveness is the real effective exchange rate,
r = e + p – p*
Where e is the log nominal exchange rate (in foreign currency units per home currency), and p is the price level (foreign denoted by *), measured by the price of output.
This bilateral measure, examined in several previous posts (e.g., ), makes sense if domestic factors of production are solely us
SO, CHINA'S currency has appreciated against the dollar. That's good. But my editor makes the point that my post on the subject takes a decidedly bilateral view of real exchange rates. China's real appreciation relative to America may ease imbalances in that bilateral trade relationship and dampen some of the heated rhetoric in Washington, but it's not the complete story.
CHINA'S currency has long been undervalued, and this undervaluation has long been a sore spot for China's trading partners. American officials, in particular, have been upset by the impact of a cheap yuan on America's trade balance with China, and by the impact of that imbalance on employment. China allowed its currency to appreciate nearly 20% against the dollar from 2005 to 2008, but it halted the rise in 2008 out of concern for the impact of the global downturn on its export-oriented economy.