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The US-China Currency Dispute: Is a Rise in the Yuan Necessary, Inevitable or Desirable?

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  • Tatom John A

    () (Networks Financial Institute at Indiana State University)

Abstract

China-bashing has become a popular US media and political sport. This is largely due to the US trade imbalance and the belief, by some, that China is responsible for it because it manipulates its currency to hold down the dollar prices of its goods, unfairly creating a trade advantage that has contributed to the loss of US businesses and jobs. This paper reviews the problem of the large trade imbalance that the United States has with China and its relationship to Chinese exchange rate policy. It examines the link between a Chinese renminbi appreciation and the trade balance and also whether a generalized dollar decline could solve the global or Chinese US trade imbalance. The consensus view explained here is that a renminbi appreciation is not likely to fix either the trade imbalance with China or overall. If these perceived benefits of a managed float are small or non-existent, then perhaps they should be pursued anyway because of small costs or even benefits for China. Section IV looks at the costs of a managed float in terms of the benefits of the earlier peg. Opponents of a fixed dollar/yuan exchange rate ignore the costs of a managed float for China, especially with limits on currency convertibility. These costs are outlined here in order to provide an economic basis for the earlier fixed rate and Chinas reluctance to appreciate. Finally it is suggested that the necessary convertibility on capital account, toward which China is moving, could easily result in yuan depreciation under a floating rate regime. This is hardly the end that China critics have in mind and it is not one that would improve US or other trade imbalances with China.

Suggested Citation

  • Tatom John A, 2007. "The US-China Currency Dispute: Is a Rise in the Yuan Necessary, Inevitable or Desirable?," Global Economy Journal, De Gruyter, vol. 7(3), pages 1-15, October.
  • Handle: RePEc:bpj:glecon:v:7:y:2007:i:3:n:2
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    Citations

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    Cited by:

    1. Makin Anthony J, 2008. "The Inflexible Yuan and Global Imbalances," Global Economy Journal, De Gruyter, vol. 8(3), pages 1-12, September.
    2. Soyoung Kim & Yoonbai Kim, 2016. "The RMB Debate: Empirical Analysis on the Effects of Exchange Rate Shocks in China and Japan," The World Economy, Wiley Blackwell, vol. 39(10), pages 1539-1557, October.
    3. Oberpriller Christian M. & Sauer Beate & Sell Friedrich L., 2008. "The Undervaluation of the Yuan Dispute: Is a Repetition of Germany's Experience in 1969 Necessary, Inevitable or Desirable? A Comment and Reply to John A. Tatom," Global Economy Journal, De Gruyter, vol. 8(2), pages 1-15, June.
    4. Dai, Meixing, 2011. "Motivations and strategies for a real revaluation of the Yuan," MPRA Paper 30440, University Library of Munich, Germany.
    5. Ceglowski Janet & Golub Stephen S., 2012. "Does China Still Have a Labor Cost Advantage?," Global Economy Journal, De Gruyter, vol. 12(3), pages 1-30, September.
    6. Yusoff Mohammed B., 2010. "Bilateral Trade Balance, Exchange Rates, and Income: Evidence from Malaysia," Global Economy Journal, De Gruyter, vol. 9(4), pages 1-21, January.
    7. Kliesen, Kevin L. & Tatom, John A., 2013. "U.S. manufacturing and the importance of international trade: it’s not what you think," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 27-50.
    8. Robin Pope, 2009. "Beggar-Thy-Neighbour Exchange Rate Regime Misadvice from Misapplications of Mundell (1961 ) and the Remedy," The World Economy, Wiley Blackwell, vol. 32(2), pages 326-350, February.

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