What this graph shows is that as the RMB has strengthened, the American trade deficit with China has actually grown:
(H/t Shanghaiist)
There was a similar trend in the 1970s and 1980s regarding the exchange rate and Japan. In 1970, the exchange rate was 360 Japanese yen to the dollar. Nixon unpegged the dollar from the yen in order to cure a growing trade imbalance, but instead the trade deficit exploded as the yen increased in value and the US dollar was debased. In the late 1980s, great pressure was put on Japan to increase the value of the yen, which was then generally in the 250 yen to the dollar range. By the end of the decade, the yen peaked at around 80 yen to the dollar, but the trade deficit continued to climb.
When we talk about trade imbalances, exchange rates are only a small part of a very complex puzzle. While weakening the dollar against other currencies may have the appearance of making American products more desirable overseas, there is no evidence that it has ever increased exports.
It would be much better to treat exchange rates as a separate issue apart from trade, rather than as an excuse to beat a trading partner over the head. There are good reasons why the Chinese economy should be liberalized, and part of that liberalization would entail free-floating exchange rates and full convertibility of the RMB. However, liberalization would also cause economic dislocation in China, so the Chinese government is right to show prudence in how it goes about this. While we should push them on this issue, it is simply better to handle this in a quiet and non-confrontational manner.
We should also have no expectation that it will be a quick fix for the US economy. It has never worked in the past, and will not work now.
Meanwhile, if people want to get the US economy going again, then they need to work on economic fundamentals within the US. A strong dollar, low taxes, and a regulatory environment that is conducive to business growth have all been shown to work in the past.
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- Senate Moves To ‘Punish’ China On Currency Policies (bigpeace.com)
- U.S. tensions rise over China’s currency policy (crawlnet.wordpress.com)
- U.S. tensions rise over China’s currency policy (cnn.com)
- 9 Key Points On The Currency Confrontation Between The US And China (businessinsider.com)
This is a very insightful entry. I like it. But I’m puzzled by the last sentence. The phrase “a strong dollar” is often used to advocate for certain exchange rate policies, but given the rest of the entry, I assume that’s not what you meant. By “a strong dollar,” are you talking about keeping inflation low?
I am generally in favor of hard currency, but I do not advocate going back to the gold standard, as that system lacked the flexibility needed to react to economic fluctuations and downturns. Soft money can lead to a weakening dollar abroad and to inflation, though this relationship is certainly complex. I do not pretend to be an expert on such issues, and am not a fanatic for any one policy.
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