RMB appreciation: Not a way out of the woods for US ECONOMY

Cui Chengwei 201310109

Since taking office in 2008, the Obama administration has kept pushing RMB appreciation. Although RMB has appreciated approximately 20% to U.S. dollar since 2005, the White House seems still unsatisfied with such appreciation rate. The Secretary of the Treasury Mr. Jacob Lew who is going to China pursues a strategic and economic dialogue with Chinese leaders on July 9th, said in Washington D.C. on Tuesday, “ The RMB is undervalued and it damages Chinese consumers, reduces their purchasing power.” Obviously, the U.S. government still hopes balancing its huge trade deficit by urging RMB appreciation. But would RMB appreciation will really improve U.S. – China trade situation, or in other words, help American products and services exporting to China thus boosting domestic economy? It is difficult to answer this question exactly.

In 2013, China was the second biggest trading partner, the third biggest export market and the largest source of imports counted in goods trade of the United States. China also contributed the largest trade deficit of the United States, which reached to 318,417 million dollars. The U.S. exported to China fall broadly into three categories: mechanical and electrical products; delivery equipment; plant products. The U.S. imported from China also can be divided into three categories: mechanical and electrical products; furniture, toys, textiles and raw materials; base metals and related products.

If you actually look at the data, it would be not too difficult to discover that the U.S. mainly exported manufactured goods to China and imported primary goods from China. We have to notice that the U.S. has already transferred primary production to developing countries which have lower labor costs. So, if RMB appreciates considerably, maybe the U.S. will stop import primary goods from China, but it has to import that kind of goods from other lower labor cost country such as Bangladesh, Vietnam or Laos. Generally speaking, the weaker dollar will help the U.S. exporters, but the stronger RMB and the higher costs within China from domestic demand press upward on the costs of things the U.S. shoppers want. In addition, if the U.S. imports less from China, it may cause a deflation in China and a counter pressure on American exports’ sales. Overall, RMB appreciation will influence several aspects of economic indicators, it is difficult to measure which indicators influences greater, but the author consider that RMB appreciation will not eliminated trade deficit of the U.S. or at least, not magically turn deficit into surplus.

To discuss this point of view, we need to figure out the real reasons of U.S. – China trade deficit. Here we must pay attention to that the trade deficit we have talked about is limited to goods trade not includes service trade. As the largest service trade exporter, the U.S. exported 682 billion dollars in 2013. Although it is not quite a number, still it will help the U.S. balancing its trade deficit with China. We have discussed that China is a low labor cost country, so there is a heavy presence of processing trade in its international trade. This characteristic happens to complement with the U.S. and makes the trade deficit