The Gold Standard  

Debate on the above topic is heating up. Paul Krugman has a simple and yet scathing blog post on the topic of renmimbi undervaluation. See here. It is unlikely that he would be invited to China again. He links to this article in NYT which refers to President Obama’s comment on the Chinese currency:

to make sure our goods are not artificially inflated in price and their goods are not artificially deflated in price; that puts us at a huge competitive disadvantage

I had wondered why the United States made public calls for renminbi re-valuation when any public request has a higher chance of being rejected. I thought it might be a case of reverse psychology. That is, America did not want China to revalue. The logic I came up with was that it was because many American firms would lose competitive advantage since they had set up manufacturing centres in China. Revaluation of the Chinese currency would raise their input prices and lower their profits.

That might still be true but what may not be true is that American exporters based in China are behind this. After all, this is what M/S Xu and Lu had to say:

We find that an industry’s level of export sophistication is positively related to the share of wholly foreign owned enterprises from OECD countries and the share of processing exports of foreign-invested enterprises, and negatively related to the share of processing exports of indigenous Chinese enterprises. ['Foreign Direct Investment, Processing Trade and the Sophistication of China’s Exports' - you can do a search on this title and get to the full paper]

What it means that sophisticated exports are usually price-inelastic. They do not gain much from exchange rate undervaluation although it would help. Nonetheless, it is hard to beleive that they would be the vocal lobby calling for no change in the government policy on the renminbi. It has to be local exporters who process, manufacture and export cheaper and less sophisticated goods.

According to Professor Arvind Subramanian, they can only be taken on by a group of affected countries rather than by one single country. The countries whose exports are affected must be countries exporting low value-added goods. In Asia, this complimentarity exists with Thailand, Malaysia and Vietnam (I am guessing) and outside Asia, with some African countries. They are too small and too scared to protest and in other cases, China might be assisting them in other ways.

So, what can bring about a change? I have no idea.

However, one thing is clear. If the US Treasury does name China a ‘currency manipulator’ that would be a defining moment (mostly in a negative sense) for the global economy and for global trade. Watch out for it in April.