Since China reformed its exchange-rate regime in July 2005, the renminbi has risen 32% relative to the dollar and about 30% in inflation-adjusted terms against a broad basket of currencies. These are hardly trivial amounts, and more renminbi appreciation can be expected in the years to come.
Unlike Japan, which was pressured by the West into a large yen revaluation in 1985 (the “Plaza Accord”), the Chinese have opted to move gradually and deliberately. American officials call this “manipulation,” arguing that market forces would have resulted in a sharper renminbi appreciation than has occurred. Fixated on stability – a concept alien to US politicians and policymakers – the Chinese prefer, instead, to play a more active role in managing the adjustment of their currency. I call that prudence – perhaps even wisdom. Two lost decades later, the guinea pig, Japan, might have a view on which approach works best.
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The trade deficit. Yes, the US runs a massive trade deficit with China – around $295 billion in 2011, or fully 40% of America’s total merchandise trade gap of $738 billion. Republicans and Democrats alike argue that this is the crux of America’s jobs problem. After all, trade deficits mean job losses.
Because the biggest share of the US trade gap is with China, a country vilified as a currency-manipulating cheater, the bilateral trade deficit has become the lightening rod for China bashers. It is what has driven Obama to go to the mat with China on recent disputes within the World Trade Organization and on restrictions on Chinese investment in Oregon wind farms, and what has led to saber-rattling by Romney on currency manipulation and trade sanctions.
But neither candidate acknowledges the much bigger elephant in the room. In 2011, the US had trade deficits with 98 countries. The other 97 deficits did not magically appear. They are all part of an enormous multilateral trade deficit that stems from America’s unprecedented shortfall of saving – a depreciation-adjusted “net national saving rate” (combining businesses, households, and the government sector) that has been negative since 2008. Lacking in savings and wanting to grow, the US runs massive current-account and multilateral trade deficits in order to import other countries’ surplus savings.
This goes to the heart of the folly of China bashing. No leading country in world history has persistently maintained a negative saving rate. Trade deficits – with China or any other country – are part of the price that America pays for its unbridled profligacy.
Unless and until the US faces up to its chronic aversion to saving – namely, by reducing massive federal budget deficits and encouraging the rebuilding of severely depleted household saving – multilateral trade deficits will persist. Simple arithmetic and basic economics tell us that a multilateral problem cannot be addressed by a bilateral solution.
international trade and floating currencies. Straight Hammer and Sickle stuff