What Will the RMB Appreciation Bring to the U.S.?

At present, a group of member of U.S. House of Representatives (HoR) has been attempting to inflame public opinion by accusing China as "currency manipulator." They are claiming that RMB appreciation can help address U.S. domestic employment and trade deficit problems, threatening to applying high tariffs on imports from China if Beijing fails to appreciate its currency. In my opinion, U.S. trade deficit cannot be addressed by RMB appreciation which, on the contrary, not only will go against the interests of U.S. consumers and American companies in China, but also will be negative for global economic recovery. Therefore, the lawmakers unfortunately are proposing a wrong idea for the American people.

First of all, RMB appreciation cannot solve the U.S. trade deficit problem. According to previous Sino-U.S. trade statistics, general trade accounted for 40%, while process trade accounted for 60%. In terms of general trade, there exists a vertical specialization between China and the U.S., reflecting two countries' cooperation rather than competition. China's exports to the U.S. by general trade mainly concentrate on labor-intensive industries as China takes advantage of cheaper labor. Without a cutting edge in labor cost, through constraining imports from China only, can the U.S. neither increase its exports and employment, nor can it promote its comparative advantage over labor cost. RMB appreciation can only shift the U.S. trade deficit from one country to some other countries, instead of eradicating the U.S. trade deficit.

Secondly, RMB appreciation will go against the interests of American low- and middle-income consumers. American consumers' expenses will increase as RMB appreciation leads to price increase in imports from China. For instance, the U.S. imported $ 41 billion of furniture and toy commodities from China in 2009. Given the assumption that American consumers absorb 50% of the cost burden brought by price increase of imports from China; if RMB appreciates by 10%, American consumers' annual expenses will be increased by $ 2 billion, which certainly will not make American people happy especially when they are suffering debt crisis and unemployment pressure.

Thirdly, RMB appreciation will reduce profits of multinational companies including American companies in China. In terms of Sino-U.S. process trade, multinational companies account for 56%. For example, the U.S. imported $ 135 billion mechanical and electronic products from China in 2009. Given the assumption that such multinational companies absorb 50% of the cost burden brought by RMB appreciation; if RMB appreciates by 10%, these multinational companies' annual profits will be reduced by $ 3.8 billion. In addition, there will also be high relocation expenses if these multinational companies have to leave China due to rising cost pressure.

Lastly, RMB appreciation will hamper global economic recovery. No matter how turbulent the economic situation is, as a responsible great country, China stabilizes its currency to prevent the global economic crisis from worsening and to contribute to world economic stability, which had been witnessed by the 1997 Asian financial crisis and the current financial crisis. At present, the global economic recovery is still in its early stage. However, the threat of the financial crisis is still looming large. Once the Chinese economy, a major engine of world economic recovery, is flamed out by RMB appreciation, that will definitely bring a disaster to the world.

In fact, China has helped the U.S. curb its inflation for years by exporting cheap products to the U.S. It is estimated that in an ordinary year, imports from China help reduce the U.S. inflation rate by 2%. According to Morgan Stanley's report, Chinese commodities' retail prices in the U.S. are more than three times that of export prices in China, leading to a huge wealth shift, by which U.S enterprises such as Wal-Mart earn great profits while U.S. employment and consumer interest have been vastly improved. The U.S. imported $ 296 billion of commodities from China in 2009, bringing $ 889 billion revenue to U.S. importing firms.

In the last half-year, China's trade surplus has shown the trend of reduction on a monthly basis. In 2009, China's trade surplus is $ 238 billion in October; in November, $ 190 billion; in December, $ 184 billion. In January of 2010, $ 142 billion; in February, reduced to $ 76 billion; and in March, deficit appeared. At this time, it is unreasonable to ask for RMB appreciation. Since the July of 2005, the RMB exchange rate against the dollar has appreciated by 21%, but the United States trade deficit with China has expanded and the trade deficit against Canada, Japan and other countries has also expanded. Such facts clearly demonstrate the RMB exchange rate not the primary reason.

Historical experience shows that, in the 1980's, the rapid appreciation of Japanese yen forced by the United States did not change the trade imbalance between Japan and the U.S. The U.S. trade deficit is a problem of its own system. Firstly, the U.S. savings rate is too low and the consumption rate is too high. Secondly, the U.S. export competitiveness is weaker than Europe and Japan. In 2009, Japan's exports to China reached $ 130 billion, while U.S. exports to China was just $ 69.6 billion. Thirdly, the United States has strictly limited exports to China, particularly in high-tech goods/services. It is unfair that some House of Representatives in the U.S. have blamed RMB exchange rate. 

In addition, it is against common sense that attempts to accuse China of manipulating the RMB exchange rate. It is China's defined goal to promote the reform of the RMB exchange rate regime. Since July 2005, the RMB has been based on the market supply and demand, keeping the eyes on "the basket currency", and implementing the managed floating exchange rate system. This is in line with internationally accepted standards. On the basis of supply and demand in the market, the Chinese Government has given the necessary management on the RMB exchange rate that is consistent with the basic principles of macroeconomics. I would ask for those eggheaded members of HoR to override economic textbooks if all the Government's macro-economic policies are considered as "manipulating" behavior.

I believe that economic globalization will continue to be the mainstream of world economic development in the future. I hope that the lawmakers who try to push China to appreciate RMB should cherish the world economic recovery and seriously rethink their idea, do not stubbornly implement the trade protectionism and destruct the international economic order just to win a few votes for themselves. Reversely, they should conform to the general trend of economic globalization, and do more good things for Chinese people, American people and people around the world.