Commentary
Yukon Huang, Isaac B. Kardon, Matt Sheehan
{
"authors": [
"Yukon Huang"
],
"type": "legacyinthemedia",
"centerAffiliationAll": "dc",
"centers": [
"Carnegie Endowment for International Peace",
"Carnegie China"
],
"collections": [
"China’s Foreign Relations",
"U.S.-China Relations"
],
"englishNewsletterAll": "asia",
"nonEnglishNewsletterAll": "",
"primaryCenter": "Carnegie China",
"programAffiliation": "AP",
"programs": [
"Asia"
],
"projects": [],
"regions": [
"United States",
"East Asia",
"China",
"North America"
],
"topics": [
"Economy",
"Trade",
"Foreign Policy"
]
}
Source: Getty
In The Media
U.S.-China Trade War: Congress Beware What You Wish For
Far from resolving America's economic woes, targeting China's currency will only result in higher prices for U.S. consumers and reduced global demand.
By Yukon Huang
Published on Oct 5, 2011
Source: Financial Times
China’s response to the proposed bill pressuring it into allowing the renminbi to appreciate was predictable, with simultaneous protests from all the relevant agencies. Given the threat to the global economy from the problems in the eurozone and the US, China’s leadership regards the currency bill as a distraction from the real issues that need to be resolved. At a time when China is one of the few sources of global growth, ratcheting up protectionist sentiments only makes it harder to secure the necessary multilateral co-operation. The country’s government sees the currency debate as yet another sign of why the American political system is broken.
Many within China thought that given recent developments, criticism of its exchange rate policies would become more muted. After all, China has continued its policy of gradual appreciation of 5-6 six per cent annually. With the euro crisis and strengthening US dollar, the renminbi has been the exception in appreciating, while other major currencies have depreciated. China also notes that its trade surplus has declined sharply from 7 per cent to 8 per cent of gross domestic product five years ago to a projected 1-2 per cent for this year. And while reserves continue to pile up, this is seen as having more to do with capital inflows seeking higher returns – encouraged by expansionary US monetary policies – than by misaligned exchange rates.
Moreover, Beijing argues that bilateral trade balances are meaningless in a world dominated by production networks using China as the assembly plant for the world. More than half of the country’s exports come from “processing” trade, with China accounting for some 20 per cent of the value produced and the rest from components imported from other Asian countries, Europe and America. China’s trade surplus comes from processing trade. Thus America’s large bilateral trade deficit is not really with China but with east Asia more broadly. Take the iPod: it is recorded as a $150 export from China to the US – yet only $5 of the value added originates in China, the rest comes from half a dozen other countries with the bulk accruing to Apple itself.
In this context if Congress gets its way, the net impact will not be more American jobs but reduced global demand and higher prices for US consumers. As the recent ‘Spillover Report’ by the International Monetary Fund concluded – a 10 per cent appreciation of the renminbi would have a negligible effect on the US trade balance or its GDP. Yet China has little appetite to turn this affair into a full-blown trade war since it has benefited greatly from open markets. Thus while the leadership will not let any perceived negative action go unchecked, its motivation will be to work towards constructive solutions.
America should worry more about maintaining its position at the upper end of the technology spectrum as China may feel the need to reinvent itself if the pressure to sharply appreciate its exchange rate continues. No wonder most US companies are more concerned about market access and technology transfer than futile currency wars.
About the Author
Yukon Huang
Senior Fellow, Asia Program
Huang is a senior fellow in the Carnegie Asia Program where his research focuses on China’s economy and its regional and global impact.
- Three Takeaways From the Biden-Xi Meeting
- Europe Narrowly Navigates De-risking Between Washington and BeijingCommentary
Yukon Huang, Genevieve Slosberg
Recent Work
Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.
More Work from Carnegie China
- Who Paid for China’s Last Debt Cleanup, and Who Will Pay for the Next?Commentary
China’s banking crisis in the 2000s was resolved by transferring the costs to households through financial repression—a decision that recapitalized the banks while exacerbating the structural imbalances that continue to shape the Chinese economy today.
Michael Pettis
- Caught in the Middle: Chinese Biotech Firms’ Divergent Responses to U.S. SanctionsCommentary
Chinese biotech companies have been on the receiving end of U.S. economic coercion. Yet their responses have differed significantly because firm and state interests are not uniformly aligned. For Washington, treating all Chinese tech firms the same, irrespective of their actual interests, risks pushing them farther into Beijing’s corner.
Xue Gong
- Are Data Centers the Solution to China’s Renewables Excess Capacity?Commentary
China’s latest energy plan explicitly calls for integrating data centers into the electricity system, particularly connecting them to green energy. It appears Beijing wants to use compute as a source of domestic demand to absorb renewables excess capacity.
Damien Ma
- Trump and Xi Are Angling for Three Years of StabilityCommentary
But their "principal to principal" model will only be as effective as the political strength of each leader back home.
Damien Ma
- China Sells Stability Amid American VolatilityCommentary
U.S. unpredictability has allowed China to capitalize on its positioning as the “responsible great power”. Paradoxically, the more China wins the perception game, the more likely expectations will rise for Beijing to deliver not just words but to demonstrate with its deeds.
Chong Ja Ian
