The U.S. is the source of most of the political heat generated by China’s foreign exchange policy. But how does that policy affect the developing world?
According to U.S. lawmakers, manufacturers and a fair number of academics, China keeps its currency deliberately undervalued as a way to boost exports to the U.S., to the detriment of U.S. manufacturers. Now three economists — Aaditya Mattoo of the World Bank, Prachi Mishra of the International Monetary Fund and Arvind Subramanian of the Peterson Institute for International Economics — make the case that China’s forex policies have a big effect on developing nation exporters as well.
In fact, they find, the way China values the yuan has a bigger effect on developing country exporters because China competes more closely with exporters in the developing world.
According to the study, released by the World Bank on Thursday (pdf), a 10% increase in the yuan vs. the dollar would boost exports of a typical product from other developing nations in the U.S. market on average by 1.5% to 2%. In some cases, the gains for developing nations could be as high as 6% for every 10% of yuan appreciation vs. the dollar.
So keeping the yuan deliberately undervalued would have the opposite effect, which economists dub “beggar-thy-neighbor” policies.
The logic is fairly straightforward: If China were to keep its currency undervalued compared to the dollar, it would give it a leg up in competition with other countries for the U.S market. The question is by how much. The researchers tease out the numbers from looking at trade data from 124 developing country exporters and 57 large importers covering 6,000 products between 2000 and 2008, when the yuan appreciated 30% compared to the dollar.
Further appreciation, the authors argue, “could provide a substantial boost to developing county exports.”
In an email exchange, Mr. Subramanian argues that the results could help the U.S. in its endless campaign to get China to lift the value of yuan by recruiting allies among developing nations. “We should and could have a more multilateral approach to China’s exchange rate,” he said, “ instead of the U.S. trying to do it on its own.”
