Increasingly bipartisan pressure in the US is building to force China to increase the value of its currency. Senators Chuck Schumer, Sherrod Brown and others say that the RMB is undervalued by 25-40% or more, and that if it were allowed to float freely, US exporters would benefit. An implication of this thinking is that our trade deficit with China would be brought into balance.
China undeniably controls its currency through central government decision making. The yuan does not float or trade in market-set bands. For reasons sufficient to the Chinese Government, and obvious in its mercantilist and pro-export effects to others, the Chinese currency is set in a manner to achieve Chinese objectives. And it is virtually a tautology that if the yuan were to rise in value, it would become easier for exporters to sell into China and for non-Chinese products to be more competitive with Chinese domestic products.
But – and this is a substantial but – it does not follow that a foreign company cannot compete with Chinese producers, or that a country cannot achieve a trade surplus with China even in the face of an undervalued currency. Or to say it differently, if the Chinese currency rose in value, it does not follow that US exports to china would inexorably move upwards to the same degree as the currency readjustment.
It was only five years ago that Senator Schumer argued that China should increase its currency’s value by about 26% - or the US should impose sanctions. Since then, the RMB has appreciated more than 26%. Today Senator Schumer again argues that the RMB needs to increase in value about 26% - or the US should impose sanctions. And yet, despite the upward valuation of the past five years, the US trade deficit with China continues.
Floyd Norris’ New York Times article, “China Trade Surpluses Bear Watching, Up or Down,” Sept. 17, 2011, p. B3, provides an important overview of reality. Since the end of 2007, when the global economic crisis began, the US trade deficit with China has increased US$162.9 billion on a full-year basis, and US$192.2 billion in the past 12 months (Sept.2010 to Aug. 2011). While this was happening, however, other nations with economics not unlike that of the US experienced increasing trade surpluses with China. Germany, for instance, is running about a US$20 billion surplus year on year, South Korea a US$75 billion surplus, the UK a US$30 billion surplus. About a tenth the size of the US, Australia has a US$43 billion surplus for the past year (due in large part to raw material exports). One can argue differences among these economies, of course. But the plain conclusion from these figures is that achieving a balance or surplus with China is not the inevitable result of China’s unfair currency decisions. And overall, China has been experiencing deterioration in its trade surplus in goods. In 2007 it had an overall world goods trade surplus of US$262 billion, which dropped to about US$170 billion for the past 12 months. That is about the amount of the US trade deficit with China.
The US must look to itself if it wants to achieve an eventual balance or better in trading in goods with China. Both the types of goods for export and the ways in which companies organize and the US Government supports the export of goods to China must alter. Otherwise, large continuing deficits can be expected with China, just as this occurs with Japan, whose yen has been freely convertible for years (and Japanese central bank intervention is not the subject of congressional demands or claims of unfair manipulation).