International Finance International Trade US-China

More US-China Sparring

Written by Steve Suranovic

The US and China stepped up their sparring against each other last weekend in Honolulu at the APEC summit.  Reuters reports, “While insisting he wanted stable ties with China, Obama in quick succession demanded it “play by the rules” of international trade, said its export-driven powerhouse “throws the whole world economy out of balance,” and insisted it act like a “grown up,” rather than posturing as a developing nation.”

China was quick to respond, arguing that it would only abide by trade rules that it participated in negotiating, not ones unilaterally determined, as I suspect China views the US demands to raise its currency value.   Legislation, stalled in the US Congress, would label China a currency manipulator and make it easier to initiate trade remedy actions against Chinese imports.  From China’s perspective, its currency has been held semi-fixed at the same or rising value for the past 20 years.  This is similar to many other countries that continue to maintain fixed exchange rates to promote stability and reduce uncertainty in international transactions.  While it is certainly true that a low currency value can make exports easier and inhibit imports, contributing to China’s trade surplus with the US, it is also true that many other factors influence trade imbalances, including price and interest rate differences, savings rates, and the potential for future economic growth.  Indeed even at a fixed exchange rate, China’s exports are already becoming more expensive because inflation is rising by as much as 2-4% faster than in the US.  Additionally, an appreciation of China’s currency alone offers no guarantee that it will make any dent in the US trade deficit.  In many episodes with other countries in the past, appreciating currencies did not make a significant dent in a country’s trade surplus with another.  The best example of this, perhaps, is the large appreciation of the Japanese yen during the 1980s and up till today which has still not caused our trade deficit with Japan to turn to surplus.  The point then is that too many other factors cause trade imbalances to expect that a simple yuan appreciation will cause a big turnaround in our trade deficit.

Instead our continual sparring with China over currency and other matters, is likely to do little more than irritate the other and result in increasing trade actions and reactions rather than dramatic changes in trade imbalances that will miraculously resolve the US unemployment problem.

About

Steve Suranovic received his B.S. in mathematics from the University of Illinois at Urbana/Champaign and his M.S. and Ph.D. in economics from Cornell University. He has been a faculty member at the George Washington University since 1988. He has served several terms as the current Director of the International Trade and Investment Policy M.A. program at the Elliott School of International Affairs.

About the author

Steve Suranovic

Steve Suranovic received his B.S. in mathematics from the University of Illinois at Urbana/Champaign and his M.S. and Ph.D. in economics from Cornell University. He has been a faculty member at the George Washington University since 1988. He has served several terms as the current Director of the International Trade and Investment Policy M.A. program at the Elliott School of International Affairs.

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