China’s Currency & U.S.-China Relations
Monday, 5 April 2010
This event featured panelists Robert Z. Aliber, emeritus professor of international economics and finance at the Graduate School of Business at the University of Chicago; Daniel Rosen, adjunct associate professor at Columbia University and visiting fellow with the Peterson Institute for International Economics (PIIE); and Shang-Jin Wei, professor of finance and economics and N.T. Wang Chair in Chinese Business and Economy at Columbia Business School. Professor Janow moderated this panel discussion, which centered on China’s currency as pegged to the USD and implications for the future of U.S.-China relations.
Professor Janow opened by briefly noting the escalation of tensions between the United States and China on a number of issues including trade, arms sales to Taiwan, and the yuan. The Chinese yuan has been pegged to the USD since mid-2008 and there exist a variety of views within the United States and China on how much and how soon the yuan should appreciate.
Professor Aliber reviewed China’s phenomenal average annual growth rate for the last thirty years of 14 percent in the traded goods sector and eight percent in the non-traded goods sector. He argued that China’s large trade surplus, 5% of GDP, combined with massive amounts of international reserve assets, $2,600 billion, have resulted primarily from China’s policies of financial repression which were adopted to maintain its undervalued currency. He believes that as long as China continues to grow rapidly and productivity in the traded goods sector remains strong, the Chinese yuan’s real appreciation is inevitable. In the end, the government faces a complex series of trade-offs that involve the nominal appreciation of the yuan, an increase in the consumer price level, and consequences resulting from further financial repression. He argued that financial repression cannot be a long-term equilibrium situation, considering Japan’s failed usage of repression policies in the past. If China is not willing to reduce its bilateral trade surplus with the United States, he believes the U.S. government should adopt its own measures to lower the imbalance.
Professor Rosen then outlined the three main allegations against an unappreciated yuan: (1) its contribution to external imbalances in the United States; (2) its role in allowing China to accumulate an unnatural level of power; and (3) its ability to cause global imbalances which prevent the existence of a stable global economy. He then discussed the comparison between China and Japan in the 1980s, the true cause of the U.S.-China trade imbalance, and his recommendations for future policy. He believes that even if the yuan is allowed to appreciate, it will not solve the fundamental trade imbalance between the United States and China. He concluded that the United States needs to consume less, save more, and generate higher GDP growth to shift its net imports lower.
Professor Wei believes that the yuan’s appreciation and its effects on the U.S. current account deficit and American job market are greatly exaggerated. Instead he believes there are structural factors behind the imbalances. For example, since the United States has bilateral trade imbalances with 140 economies, a reduction in the yuan may not reduce the imbalance as much as people claim. Furthermore, if the yuan appreciates and China’s exports decrease, the jobs will more likely be transferred to Cambodia rather than California, so it wouldn’t affect the American job market very much. Finally, if the yuan appreciates, there will be winners and losers in both the United States and China. In the United States, the winners will be the export firms, while the losers will be the majority of the poor who will no longer be able to buy imports from China at lower prices. In China, the winners will be importers and the majority of the poor while the losers will be exporters. Therefore, the appreciation of the yuan implies a subsidy from the working poor in the United States to those in China.
The panel discussion ended with a lively question and answer session. Ultimately, while there were varied opinions on how the U.S.-China bilateral trade imbalance can be resolved, Professors Aliber, Rosen, and Wei were all in agreement that the yuan should be allowed to appreciate and that policies must be made on both sides of the Pacific to resolve the growing trade imbalance.
This event was co-sponsored by IFEP as part of its Distinguished Speaker Series.