Home » Opinion » Chinese Views
Fixating on the yuan won't fix surplus
By John Gong |
March 9, 2010, Tuesday
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Print Edition
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AS China's foreign trade starts to recover, the issue of renminbi (yuan) appreciation has resurfaced.
Last December, China's exports increased by 17 percent, while imports increased by 56 percent. This January, exports increased by 21 percent, while imports increased by 86 percent.
Apparently the trade surplus is waning at a spectacular rate, as China's foreign trade is gearing towards a more balanced structure. Nonetheless, international pressure for yuan appreciation continues to mount. In his New York Times column last year, Paul Krugman wrote in an inordinately hash tone advocating appreciation of the yuan.
Against this background, the University of International Business and Economics, where I teach, and the Department of Commerce jointly held a conference on the issue of trade and the exchange rate last week.
One study presented during the conference may be cited as a response to Mr Krugman's argument. Simply put, currency appreciation won't do it.
The study covering 45 countries over a period of the last 40 years indicates no causality (in the Granger analysis sense) between the exchange rate and the trade balance. I don't even have to dig into the nitty-gritty of this econometrics exercise to buy into this theory.
Just take a look at the last three years before 2008, a period in which the yuan appreciated by about 20 percent. This is also precisely the period in which China saw the greatest growth in exports.
The fundamental approach to addressing the Sino-US trade imbalance should be structural in nature, instead of a fixation on the "magic" of currency appreciation. America needs to increase exports to China in areas where it has a leading technology and commercial edge. And this can be done by government and corporate efforts on both sides.
For example, the US should develop technologically advanced and energy-efficient cars (including those using alternative energy technologies) that suit Chinese consumers. China is now the world's largest automobile market and this year it looks as though it is still going strong. On the China side, I'm an advocate of industrial policies of limiting the growth of the Japanese and German auto presence in China. After all, Japan and Germany already enjoy a trade surplus with China.
The US should also consider relaxing its rigid export control regime, which remains largely a legacy of the cold war. China has a large appetite for America's high technology products.
Another important structural approach to addressing Sino-US trade imbalance is for China to weed out low value-added exporters, particularly those companies that cause antidumping concerns. Take textiles and the apparel industry as an example. According to one apparel export executive at the conference, 95 percent of China's export volume in this sector is for OEM (original equipment manufacturer) orders. Most companies do not have their own brand and marketing functions.
The profit level is pathetic, ranging between 3 percent and 5 percent. My expectation is that there will be a major industry restructuring and reshuffling, particularly as this sector faces the challenges of a shortage of migrant worker supply, price increases of raw materials, and stricter enforcement of insurance and medical benefits as required by the labor law.
There is no panacea for the Sino-US trade problem. And yuan appreciation is definitely not the answer.
Trade imbalance between the two countries is a long-term structural issue, and requires a multi-faceted system approach in terms of policy development. There are many policy instruments that both sides can use constructively, other than fixation over the exchange rate alone.
(The author is associate professor of economics at the University of International Business and Economics in Beijing. The views are his own. His email: johngong@gmail.com)
Last December, China's exports increased by 17 percent, while imports increased by 56 percent. This January, exports increased by 21 percent, while imports increased by 86 percent.
Apparently the trade surplus is waning at a spectacular rate, as China's foreign trade is gearing towards a more balanced structure. Nonetheless, international pressure for yuan appreciation continues to mount. In his New York Times column last year, Paul Krugman wrote in an inordinately hash tone advocating appreciation of the yuan.
Against this background, the University of International Business and Economics, where I teach, and the Department of Commerce jointly held a conference on the issue of trade and the exchange rate last week.
One study presented during the conference may be cited as a response to Mr Krugman's argument. Simply put, currency appreciation won't do it.
The study covering 45 countries over a period of the last 40 years indicates no causality (in the Granger analysis sense) between the exchange rate and the trade balance. I don't even have to dig into the nitty-gritty of this econometrics exercise to buy into this theory.
Just take a look at the last three years before 2008, a period in which the yuan appreciated by about 20 percent. This is also precisely the period in which China saw the greatest growth in exports.
The fundamental approach to addressing the Sino-US trade imbalance should be structural in nature, instead of a fixation on the "magic" of currency appreciation. America needs to increase exports to China in areas where it has a leading technology and commercial edge. And this can be done by government and corporate efforts on both sides.
For example, the US should develop technologically advanced and energy-efficient cars (including those using alternative energy technologies) that suit Chinese consumers. China is now the world's largest automobile market and this year it looks as though it is still going strong. On the China side, I'm an advocate of industrial policies of limiting the growth of the Japanese and German auto presence in China. After all, Japan and Germany already enjoy a trade surplus with China.
The US should also consider relaxing its rigid export control regime, which remains largely a legacy of the cold war. China has a large appetite for America's high technology products.
Another important structural approach to addressing Sino-US trade imbalance is for China to weed out low value-added exporters, particularly those companies that cause antidumping concerns. Take textiles and the apparel industry as an example. According to one apparel export executive at the conference, 95 percent of China's export volume in this sector is for OEM (original equipment manufacturer) orders. Most companies do not have their own brand and marketing functions.
The profit level is pathetic, ranging between 3 percent and 5 percent. My expectation is that there will be a major industry restructuring and reshuffling, particularly as this sector faces the challenges of a shortage of migrant worker supply, price increases of raw materials, and stricter enforcement of insurance and medical benefits as required by the labor law.
There is no panacea for the Sino-US trade problem. And yuan appreciation is definitely not the answer.
Trade imbalance between the two countries is a long-term structural issue, and requires a multi-faceted system approach in terms of policy development. There are many policy instruments that both sides can use constructively, other than fixation over the exchange rate alone.
(The author is associate professor of economics at the University of International Business and Economics in Beijing. The views are his own. His email: johngong@gmail.com)
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