China's Currency and the Trade Deficit

Wednesday, 22 September 2010 01:59




The point about China assembling items that involve inputs from other countries ignores the flip side of this story: there are many goods imported from countries like Japan and Germany that have substantial inputs from China. If the value of the yuan rises relative to the dollar, then these imports would be more expensive in the United States, making people here more likely to buy domestically produced goods. This will help the U.S. trade balance even though it will not be picked up in the trade balance with China.

Finally, the discussion of the relationship of the yen and the dollar is inadequate since it ignores the huge difference in relative inflation rates in the two countries. Since 1990 prices in Japan have fallen by more than 10 percent. They have risen by more than 50 percent in the United States. This means that to keep the trade situation from changing, the yen should have risen by more than 60 percent over this period.