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Reflect on 'China's Responsibility' Theories
UPDATED: October 21, 2010 Web Exclusive
Economist: Yuan Is Not Undervalued
All the accusations that the renminbi’s exchange rate has been manipulated to stay at a low level and keeps going down are totally groundless and untrue

China's high foreign trade surplus has been an important weapon the Western countries have wielded to criticize the renminbi's exchange rate. Do you think the U.S. trade deficit with China is related to the renminbi's undervaluation?

China's foreign trade surplus grew briskly between 2005 and 2008. Interestingly, during the same period, the renminbi's value against the U.S. dollar climbed by a staggering 21.2 percent. In 2009, the renminbi's exchange rate against the U.S. dollar stayed the same while China's foreign surplus shrank by nearly $100 billion to $196.06 billion. Apparently, there is no direct link between the renminbi's exchange rate and China's trade surplus level.

Although China has maintained a large trade surplus, its trade balances with different partners vary significantly. During the first half of this year, China's total trade surplus was $53.3 billion. While the Chinese mainland's trade with Japan, South Korea and Taiwan yielded a total deficit of $101.46 billion, China's trade surpluses with the United States and EU were $77.05 billion and $62.03 billion, respectively. During the same period, the renminbi's exchange rate against the Japanese yen dropped, its exchange rate against the U.S. dollar remained stable, and its exchange rate against the euro picked up before declining. According to the trade-weighted exchange rates of the BIS, Chinese mainland's trade with Japan, South Korea and Taiwan accounts for 31.6 percent of the renminbi's exchange rate, while its trade with the United States and the eurozone accounts for 21 percent and 18.6 percent, respectively. China's trade with countries most responsible for its exchange rate's value has shown deficit. How, then, can people hold the exchange rates responsible for U.S. trade deficits with China?

As a matter of fact, the main reason behind China's foreign trade surplus is China's position in the international division of labor and the industrial chain. China's situation is similar to Canada and Mexico in their trade with the United States and Eastern European countries in their trade with Germany.

Between 1997 and 2009, U.S. exports overall grew by 53.7 percent, while its exports to China surged by 443.4 percent, 8.26 times its overall export growth. How could this happen if the renminbi were undervalued? During the same period, the growth rate of U.S. exports to China was 1.19 times that of U.S. imports from China, while U.S. imports overall went up at a speed 1.47 times that of its overall exports. This indicates that compared with the currencies of other major U.S. trading partners, the renminbi is not undervalued; indeed, its exchange rate level is favorable to the United States.

Last March, the U.S.-based Economic Policy Institute published a report titled Unfair China Trade Costs Local Jobs, saying that the U.S. trade deficit with China cost 2.41 million jobs in the United States between 2001 and 2008. What do you think of this conclusion?

This notion doesn't hold water. In 1999 and 2000, when the U.S. trade deficit with China increased by $11.77 billion and $15.1 billion, respectively, the employed labor force in the United States went up by 3.172 million and 2.005 million people, respectively. By contrast, in 2001, when the trade deficit narrowed, the United States lost 1.78 million jobs and the renminbi's exchange rate against the U.S. dollar was stable during the year. The U.S. manufacturing industry lost 473,000 jobs in 2008. The figure spiked to 1.523 million in 2009, a year that witnessed the U.S. trade deficit with China shrinking by $41.2 billion year on year. There was no fluctuation in the renminbi's exchange rate against the U.S. dollar in 2009. Evidently, the job losses in the United States have nothing to do with either its trade deficit with China or the renminbi's exchange rate.

The changes in U.S. unemployment rates are fundamentally attributable to the country's economic cycles and productivity. Between 2001 and 2003, total production of the U.S. manufacturing industry shrank by 5.01 percent, while its productivity rose by 15.15 percent. Theoretically, 3.02 million jobs would be eliminated as a result. The actual figure was 2.896 million. Between 2008 and 2009, total production of the U.S. manufacturing industry went down by 9.6 percent while its productivity rose by 5.9 percent. Theoretically, 1.907 million jobs would be lost as a result, while the actual figure was a close-enough 1.996 million.

It is also irrational for some Western economists to blame China for the imbalances in the world economy given the wide belief that Wall Street greed and deregulation of the U.S. financial sector were the fundamental causes of the crisis. Another popular theory is that the imbalances are caused by imbalances within the United States, which has a much higher current account deficit than any other country.

In 2009, the United States saw a significant decline in its current account deficit. The main cause was that the U.S. trade deficit dropped by $315.26 billion, of which the decrease of the deficit in fossil fuels (mainly oil) accounted for 63 percent. The top reason for the U.S. trade deficit is its energy imports, which fluctuate mainly with oil prices. Speculation in the futures market is the core problem with oil prices, and the United States can only solve most of its deficit problems by regulating financial speculation.

Another important reason behind U.S. trade deficits is that U.S.-based multinationals set up manufacturing facilities overseas and import from their overseas branches. According to statistics from 2007, without such trade, the U.S. trade deficit would shrink by $234.5 billion, accounting for 28.2 percent of its trade deficits in 2007.

Therefore, the United States should take primary responsibility for global economic imbalances rather than blaming China.

Then why have some Western countries used the rhetoric of an "undervalued renminbi" to demand that China take on the responsibilities of a major country?

As a matter of fact, vocal critics of the renminbi's exchange rate are mostly members of the U.S. Congress. For example, Senator Chuck Schumer is neither an economist nor an expert on exchange rates. Naturally, his criticism of the renminbi's exchange rate has ulterior motives.

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