Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Relative currency values are not static
The Canadian Globe and Mail has an excellent report on the Chinese currency issue. It reports that Congress has gotten into the act with a bipartisan Senate Bill sponsored by Senators Charles Schumer and Lindsay Graham.
But, I was especially impressed when an argument of ours from Trading Away Our Future got into print in this article. Here it is:
The Chinese allowed the yuan to appreciate by 22.5 per cent against the U.S. dollar between 2006 and mid-2008, but then froze it at a level of about 6.8 to the greenback in response to the global crisis, where it has remained. But its implicit value has been rising steadily, thanks to the Chinese economic gains during that time.
The fact is that when a country manipulates currencies, one of the effects is that it gets more manufacturing investment and its victims get less manufacturing investment. Thus in the future, the natural gap between their currencies grows.
Some people might think that if the Chinese yuan was undervalued by 40% and then it rose by 22.5%, that it is now only undervalued by 22.5%, but they miss the fact that during that period China got tons of manufacturing investment while we got very little. The Chinese yuan may be undervalued now by even more than 40%.
Journal of Economic Literature:
Atlantic Economic Journal: