Will Chinese Yuan Appreciation

Will Chinese RMB appreciation decrease U.S. trade deficit?

As the United States faces the looming threat of recession, much attention has been given to its ballooning bilateral trade deficit with China. Politicians in Washington, small U.S. manufacturing firms, and trade unions have alleged that this imbalance is due to unfair foreign competition afforded by Chinese Government’s manipulative currency under valuation. I think Chinese currency will not improve the U.S. trade deficit, and instead it will worsen the living standard in the world. The main reason why the U.S. has huge trade deficit is the natural consequence of larger macroeconomic forces within the U.S. economy.

The United States has posted a trade deficit since the 1970s, and it has been rapidly increasing since 1997. The U.S. trade deficit hit a record high of 763.6 billion dollars in 2006, up from 716.7 billion dollars in 2005. The huge deficits have been increasing not only vis-a vis China but also most other trading partners as well (Mann, 2005); the imbalance on bilateral trade with China, though large, still accounts for less than one-quarter of the total. I think that China’s bilateral trade surplus with the United States is a minor macroeconomic issue, but a major political issue. That is because even if China were not running a trade surplus with the United States, somebody else would be - either Korea, Japan, India or even Europe. The U.S. trade deficit is primarily the outcome of savings and investment trends in the United States - and to the extent that the relevant savings include the government’s budget balance, most of U.S. trade deficit is American made. The politics come into play in the sense that the Chinese bilateral deficit is an easy focal point. A table named “impact of Yuan appreciation on trade balance and welfare” From the article written by Jian Zhang and Hung-Gay Fung tell us that appreciation of RMB will not solve the problem of U.S.-China trade deficit and even make the trade balance worse. If the Yuan were appreciated from 2.5% to 20%, the U.S. would increase the trade deficit with other countries from 1205.57 to 12348.81. The 10 times increase of U.S. trade deficit definitely a nightmare of U.S. economy. The higher the appreciation rates of RMB, the greater the trade deficit of U.S. with other countries. From this point, we know that China currency undervaluaton is not a key factor causing U.S.’s huge trade deficit.