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The U.S.-China Trade Balance and the Theory of Free Trade: Debunking the Currency Manipulation Argument

Author

Listed:
  • Anwar Shaikh

    () (Department of Economics, New School for Social Research)

  • Isabella Weber

    () (Institute of Management Studies, Goldsmiths University of London)

Abstract

The U.S.-China trade imbalance is commonly attributed to a Chinese policy of currency manipulation. However, empirical studies failed to reach consensus on the degree and kind of RMB misalignment. We argue that this is not a consequence of poor measurement but of theory. The conventional principle of comparative advantage suggests real exchange rates will adjust so as to balance trade. Therefore, the persistence of trade imbalances tend to be interpreted as arising from currency manipulation. In contrast, the Smithian-Harrodian theory explains trade imbalances as the outcome of free trade and sees unequal real competitiveness as the root cause of the U.S.-China trade imbalance.

Suggested Citation

  • Anwar Shaikh & Isabella Weber, 2018. "The U.S.-China Trade Balance and the Theory of Free Trade: Debunking the Currency Manipulation Argument," Working Papers 1805, New School for Social Research, Department of Economics.
  • Handle: RePEc:new:wpaper:1805
    as

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    References listed on IDEAS

    as
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    JEL classification:

    • B17 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - International Trade and Finance
    • F10 - International Economics - - Trade - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F60 - International Economics - - Economic Impacts of Globalization - - - General

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