1/10
FT: "A cheaper renminbi would help Chinese exporters remain competitive in the face of higher tariffs in the US, but it could also leave China open to the accusation of currency manipulation, a charge levelled by the previous Trump administration."
ft.com/content/215e50…
FT: "A cheaper renminbi would help Chinese exporters remain competitive in the face of higher tariffs in the US, but it could also leave China open to the accusation of currency manipulation, a charge levelled by the previous Trump administration."
ft.com/content/215e50…
2/10
It seems that traders are betting that the combination of an increasingly sluggish Chinese economy and a potential rise in US tariffs will force down the value of the RMB.
But I think this is a much more complicated issue than these traders might think.
It seems that traders are betting that the combination of an increasingly sluggish Chinese economy and a potential rise in US tariffs will force down the value of the RMB.
But I think this is a much more complicated issue than these traders might think.
3/10
One complication is that devaluing the RMB in response to US tariffs means retaliating not just against the US but in fact against all of China's trade partners. This might simply increase the incentive for the rest of the world to implement tariffs.
One complication is that devaluing the RMB in response to US tariffs means retaliating not just against the US but in fact against all of China's trade partners. This might simply increase the incentive for the rest of the world to implement tariffs.
4/10
A second complication is that currency devaluation doesn't work the same way in countries with overvalued currencies as in countries with undervalued currencies. In my most recent piece for Foreign Affairs, I quote Ragnan Nurkse who...
foreignaffairs.com/united-states/…
A second complication is that currency devaluation doesn't work the same way in countries with overvalued currencies as in countries with undervalued currencies. In my most recent piece for Foreign Affairs, I quote Ragnan Nurkse who...
foreignaffairs.com/united-states/…
5/10
said, all the way back in 1942, that “the devaluation of a currency is expansionary in effect if it corrects a previous overvaluation, but deflationary if it makes the currency undervalued.” China's RMB is seriously undervalued, as evidenced by its huge trade surplus.
said, all the way back in 1942, that “the devaluation of a currency is expansionary in effect if it corrects a previous overvaluation, but deflationary if it makes the currency undervalued.” China's RMB is seriously undervalued, as evidenced by its huge trade surplus.
6/10
This creates a problem for China. Like tariffs, currency devaluation works by transferring income from net importers (household consumers) to net exporters (producers). This transfer effectively subsidizes production while taxing consumption. Dani Rodrik makes a similar...
This creates a problem for China. Like tariffs, currency devaluation works by transferring income from net importers (household consumers) to net exporters (producers). This transfer effectively subsidizes production while taxing consumption. Dani Rodrik makes a similar...
7/10
point when he writes, in a recent essay, that "an import tariff is a specific combination of two different policies: a tax on consumption of the imported good and a production subsidy for its domestic supply".
project-syndicate.org/commentary/tru…
point when he writes, in a recent essay, that "an import tariff is a specific combination of two different policies: a tax on consumption of the imported good and a production subsidy for its domestic supply".
project-syndicate.org/commentary/tru…
8/10
China's problem, as a surplus country, is that it consumes too little to absorb enough of what it produces. By taxing consumption further, however, an RMB devaluation will only help the economy if the rest of the world is able to accommodate much larger Chinese surpluses.
China's problem, as a surplus country, is that it consumes too little to absorb enough of what it produces. By taxing consumption further, however, an RMB devaluation will only help the economy if the rest of the world is able to accommodate much larger Chinese surpluses.
9/10
If not, an RMB devaluation is likely to be contractionary, by reducing domestic demand by more than it expands the trade surplus. In fact my Foreign Affairs article notes that the China faces a similar problem today as the US faced in Smoot-Hawley times.
If not, an RMB devaluation is likely to be contractionary, by reducing domestic demand by more than it expands the trade surplus. In fact my Foreign Affairs article notes that the China faces a similar problem today as the US faced in Smoot-Hawley times.
10/10
For China to devalue the RMB, in other words, is like the US raising tariffs in 1930: it is unlikely to boost growth and, if it leads to retaliation, it will most likely be contractionary. Like tariffs, devaluation is only a "solution" under very specific circumstances.
For China to devalue the RMB, in other words, is like the US raising tariffs in 1930: it is unlikely to boost growth and, if it leads to retaliation, it will most likely be contractionary. Like tariffs, devaluation is only a "solution" under very specific circumstances.
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