Alarmed by the persistent and large US trade deficit vis-à-vis China and the rapidly swelling Chinese foreign exchange reserves, influential US policymakers are urging the Chinese authorities to allow a substantial appreciation of the Renminbi (RMB). This paper establishes that the arguments advanced to this effect are quite weak, as they overlook salient features of the present international economy and of China’s financial system. Indeed, the record growth of China’s exports to the US stems largely from joint ventures and affiliates of multinational enterprises; exports attributed to China usually contain a large percentage of imported components with modest value-added attributed to China itself and – indeed, the Chinese export portfolio is in the process of being significantly upgraded. Neither are the gigantic foreign exchange reserves primarily linked to the modest surpluses of exports over imports of China, but they are fed by these large net inward direct investments; and, in recent years, by ‘hot money’ which sneaks into China, notwithstanding the non-convertibility of capital flows. Thus, a moderate appreciation of the RMB would not equilibrate the bilateral trade flows or remedy current account imbalances. On the other hand, the shift in China’s growth strategy – away from export maximisation towards strengthening consumption in the vast interior – is likely to gradually bring about more balance, while appreciating the RMB in the process. There are also recent signs of easing of Chinese restrictions on international financial transactions.Good stuff. Be sure to read the whole thing here. It provides another much-needed counterweight to the seemingly endless supply of misinformation and misunderstanding out there about China and trade deficits.
Speaking of which, today's news that the US-China trade deficit reached an all-time high in 2010 was met with the usual (and ridiculous) media and politico frothing. As I've noted here innumerable times, all of that froth relies on the same old - and repeatedly debunked - conventional wisdom that a trade deficit is some sort of harbinger of economic doom, and that bilateral trade balances are accurate barometers of national and international trade policies. (Dan Griswold adds a little more commentary on these points today.) And, of course, it doesn't take a brilliant economist - or even a dumb trade lawyer like me - to notice that the significant expansion of the US trade deficit between 2009 and 2010 coincided quite nicely with - hey, look at that! - the significant increase in annual GDP growth between those same years (2009 at 0.2% vs. 2010 at 2.8%).
So here's a crazy idea. Maybe it's time for media frothers to drop the obviously-wrong conventional wisdom and open their eyes for a change. Heck, maybe they could, oh I don't know, read stuff like the new ECIPE study - or any of the myriad others like it - and actually learn something about our fascinating 21st century global economy and the silly politicians who can't - or choose not to - comprehend it.