Friday, May 21, 2010

(Somewhat) New Paper on China Currency Supports Sanity

Last month, the Heritage Foundation's Derek Scissors published a very nice web memo on China currency and the (false) conventional wisdom that an unpegged, stronger RMB would increase American jobs and reduce the US-China trade deficit.  I somehow missed that, so I'm posting it now because the whole thing is worth reading (and it has some handy-dandy charts).  Here's the gist:
The Department of the Treasury has delayed its decision on whether to label China a currency manipulator. Prominent Members of Congress attacked this delay, insisting they will seek trade action against the PRC. At the heart of congressional demands is the idea that a Chinese revaluation would mean millions of additional American jobs. This idea is almost surely wrong.

The almost is there only because advocates of revaluation are often vague about how large a change is supposed to manage this feat. Such vagueness should come as little surprise—when one examines American jobs and the value of the RMB, the thread between the two is very, very thin. No currency revaluation of any feasible size will create more than a few thousand American jobs.

The reason for the minimal impact is simple: The exchange rate with China is not genuinely important to the U.S. economy. There are other policies China has adopted, or not adopted, that are more important. There are policies the U.S. has adopted, or not adopted, that are more important. The U.S. should focus on these more important policies, such as Chinese subsidies and the U.S. budget deficit, not an exchange rate shift that will achieve almost nothing.
Scissors goes on to show how past RMB appreciation versus the dollar has done nothing to affect the US-China trade balance, and how that balance is a wholly stupid thing to obsess about - two arguments that are very, very popular on this blog.  So go ahead, check out the whole thing here.

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