Since 2004, China ‘s overall trade surplus has exhibited significant growth both in absolute terms and relative to the size of its economy. By 2006, the surplus had reached an estimated $ 250 billion, accounting for 9 percent of China ‘s GDP, and all the signs are that it is continuing to expand in 2007. At the same time, the U.S. bilateral trade deficit with China increased to $233 billion in 2006, accounting for nearly a third of the overall U.S. trade deficit. The argument coming from the U.S. Congress is that the Chinese currency, known both as the yuan and the renminbi (RMB), is being held artificially low by the Chinese authorities, causing a loss of manufacturing jobs in the U.S. and contributing significantly to the U.S. trade deficit. This has resulted in various calls for “China-bashing” legislation to be enacted by Congress, including the 2005 bipartisan bill of Senators Charles Schumer (D-NY) and Lindsey Graham (R-SC) which proposed a 27.5 percent tariff on all imported Chinese goods to offset undervaluation of the Chinese currency (The Economist) .
Recently the Wall Street Journal published a petition signed by 1,028 economists expressing concerns about the possibility that Congress will enact protectionist trade policies against China . The economists present the textbook argument that levying tariffs against China will increase “…the possibility of a futile and harmful trade war. American consumers and businesses would pay the price for this senseless war through higher prices, worse jobs, and reduced economic growth…” (Club for Growth) While it is hard for any economist to disagree with these sentiments, it is also the case that the issue of China’s external trade balance and the connection with its continuing phenomenal rate of economic growth is more than just an argument about the pros and cons of free trade. The argument put forward in this bulletin is that a revaluation of the RMB is actually in China ‘s own best economic interests, and although such a revaluation might undercut anti-Chinese sentiments in the U.S. , it will likely not do very much actually to reduce the U.S. trade deficit.
The complete article can be viewed at the Andersons Policy Bulletin Page at:
http://aede.osu.edu/programs/Anderson/trade/ChinaExchangeBulletin.htm