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 Russia Eurasia Center
- Russia’s Coal Industry Is Running on Borrowed TimeCommentary
Powerful lobbyists and inertia led to Russia’s coal-mining sector missing an excellent opportunity to solve its structural problems.
Alexey Gusev
- What’s Having More Impact on Russian Oil Export Revenues: Ukrainian Strikes or Rising Prices?Commentary
Although Ukrainian strikes have led to a noticeable decline in the physical volume of Russian oil exports, the rise in prices has more than made up for it.
Sergey Vakulenko
- Russia Is Meddling for Meddling’s Sake in the Middle EastCommentary
The Russian leadership wants to avoid a dangerous precedent in which it is squeezed out of Iran by the United States and Israel—and left powerless to respond in any meaningful way.
Nikita Smagin
- Will Hungary’s New Leader Really Change EU Policy on Russia and Ukraine?Commentary
Orbán created an image for himself as virtually the only opponent of aid to Ukraine in the entire EU. But in reality, he was simply willing to use his veto to absorb all the backlash, allowing other opponents to remain in the shadows.
Maksim Samorukov
- Power, Pathways, and Policy: Grounding Central Asia’s Digital AmbitionsCommentary
Central Asia’s digital ambitions are achievable, but only if policy is aligned with the region’s physical constraints.
Aruzhan Meirkhanova
