The conventional wisdom is that once the value of the Chinese Yuan is increased, the USA’s trade deficit with China would start falling. This reasoning has prompted many Americans to push for further, faster revaluation of the Yuan even after China changed its currency policy.
For those who endorse this rationale, the Yuan’s value is a paramount factor behind China’s, and their country’s trade balances.
But for John Ross, former deputy mayor of London in charge of economic and business policy, the trade gap between a country and China would widen instead of narrowing down, at least in the short term, if the Yuan’s values go up.
Mr. Ross, a visiting professor at Antai College of Economics and Management in Shanghai Jiaotong University, says that once the Yuan’s value rises the Americans would demand further revaluation, ultimately forcing the Yuan to rise to a level that would not only disrupt China’s trade and economy, but also pose a threat to the entire World’s economy.
Moreover, the number of jobs in the US would not increase unless the federal government changes its economic policy and raises investments, which is the real solution to its problem. Pressuring China to raise the Yuan’s value sharply will not help. “Most people, particularly those abroad, don’t know the real situation. The reason they want the Yuan to be revaluated further is because they think it would reduce China’s trade surplus, this is simply not true.”
From what happened between Y’s 2005 and 2008, when the Yuan rose 21% against the USD, it’s clear that China’s “trade surplus rose, too”, Ross said. Any revaluation of the Yuan raises the price of exports and reduces the price of imports, which means China’s trade surplus would get bigger as its currency rises.
By examining historical data, Ross has found that China’s exports and imports grew simultaneously after Y 2005 in terms of volume, but the prices of exports rose more relative to import thanks to the revaluation of the yuan. “That’s why its trade surplus with the USA is bigger today.”
There’s a big debate among economists over what would happen in the long term if the Yuan rose further, he says. Some people think China’s trade surplus would increase, while others think it would fall in the long run. “But there’s no difference in what they say would happen in the short term.”
Seen from the history of US trade, its overall trade deficit rose at nearly US$70B a month until Y 2006, he says. Then it stabilized before rising again after the passage of the worst period of the Global financial crisis. “That’s why the American people are getting agitated because it has worsened, but it is not rising because of China, for, I’m using US figures, not Chinese figures, the trade surplus of China with the US is rather stable, slightly under US$20B a month.”
In other words, claiming that the trade deficit of the US is rising because of China is simply not true, he says. “It’s because its America’s trade deficit with the rest of the world is rising, too.”
The US has a trade deficit with about 90 countries. “If you reduce its trade deficit with China, all that would happen is that its trade deficit with some other country would increase.”
US hawks, however, have always targeted China and pressured it to dance to the tune of their demand. Even if China has pledged to make the yuan more flexible by reforming its exchange rate mechanism further and peg it to a basket of currencies to better reflect the demand of the market, some US politicians and industrial leaders say it’s “too little too late” and demand the Chinese currency be revaluated by up to 40 percent.
Forcing the value of the yuan to rise would cause further uncertainties in the world economy, which today faces other big challenges such as the European Union debt crisis. “We are not (living) in a normal stable economic environment; we are just about recovering from a very bad financial crisis and what happens in the next 6 to 18 months is very important and would have a very big effect,” he says. “The last thing the world needs at present is a short-term increase in China’s trade surplus because of an increase in the value of the yuan.”
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