Cato Institute’s Dan Ikenson had a timely opinion piece in Friday’s Wall Street Journal. He deconstructs the popular argument that China’s “undervalued” currency is a significant cause of the U.S. trade deficit.
As Ikenson points out, U.S. consumers continue to purchase Chinese goods and will continue purchasing goods from China regardless of an “appreciating renminibi.” In other words, forcing China to appreciate its currency will not alleviate the U.S.-China trade deficit. Additionally, Ikenson asserts that if Congress imposes sanctions on China due to its questionable monetary policy, the U.S. economy will suffer. He writes:
..Between July 2005 and July 2008 the renminbi rose 21% against the dollar, to $.1464 from $.1208, where it had been pegged since 1997. But the trade deficit, according to the trade statistics compiled by the U.S. Census Bureau, nevertheless increased to $268 billion from $202 billion over that period.
Textbooks say that the Chinese should increase purchases of American products when the renminbi’s value increases against the dollar — and indeed they did by $28.4 billion. But exports to China were already increasing rapidly before the currency began to appreciate, rising by $19 billion between 2002 and 2005, according to the Census Bureau.
…U.S. imports from China between 2005 and 2008 actually increased by a whopping $94.3 billion, or 39%.
By focusing on undervalued Chinese currency, Congress ignores any viable concerns over U.S.-Chinese trade relations. These suggested sanctions will do little to address U.S. trade deficit with China and could quite easily hurt U.S. business and consumers by a potential U.S.-China trade war.