But most economists say a big yuan revaluation wouldn't have a major impact on trade.
As long as Americans spend more than they save and the Chinese continue to save at high rates, the trade deficit will endure.
"To achieve any meaningful change in trade flows, you need a reduction in (spending) by countries that spend more than their income and expenditure increases in countries that spend less than their income," said Nouriel Roubini of Roubini Global Economics. "Changes in relative prices are not by themselves sufficient."
America's trade gap with China hit $235 billion last year.
I've seen various opinions on this matter, but I tend to agree with the above statement. The real issue is the US consumes more than it produces. That is what the trade deficit really represents. I wrote an article dealing with outsourcing that came to the same conclusion: so long as the US buys cheap stuff, we're going to outsource manufacturing to places where it's cheaper to make stuff.
However, I think it's important to realize where this might lead. To quote Paul Volcker from an article he wrote two years ago (and which is still very relevant):
The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.
3 comments:
At least they get the link between saving and the trade deficit ... if only they would get the causality turned around the right way.
America consumes more than it produces because it imports more than it exports.
Savings is a residual ... its how much disposable income is received but not spent. If less of the disposable income that is spent goes to imported products (goods and services), and more to domestically produced products, while more income is generated by exported products ... then there will be more income, and more saving as a result.
Get the deficit back under control, and there will be more saving ... have a runaway trade deficit, and the income leaks out of the income-expenditure loop as current account outflows, and is not available to leak out as savings.
"...if only they would get the causality turned around the right way."
Brucemf, if they addressed the problem correctly, then they'd need to blame the problem on the elites' crazy trade policies rather than the rather slovenly, lazy Joe Schmoe Everyguy who isn't saving enough. Didn't you get the memo?
OK, joking aside, revaluing the yuan will raise the trade deficit in the short run (say less than 3 year period). The yuan won't see a major step function jump in value, rather it will see a increase in the value slope which will begin to reduce US propensity to consume Chinese manufactures. However, all of the global corps will have their supply chains set to import from China, which will not be able to turned off or diverted immediately. So, as the yuan increases in value and the physical demand only begins a lagged decrease, the deficit will balloon. Once everyone perceives the relative value shift as becoming permanent, then the deficit will begin to slow down its rate of growth and ultimately contract. Eventually, the Chinese will need to do what even the Japanese and Koreans did - build plants in the US. In the meantime, the trade road will be pretty bumpy.
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