Is China’s Exchange Rate Policy a Form of Trade Protection?

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Makin, AJ
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Robert Crow

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2009
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This paper examines how China's heavily managed exchange rate contributes to its huge trade surplus with its major trading partners, most notably the United States. Based on the distinction between economies' aggregate output and expenditure and on the premise that exchange rates are shared variables, it develops a straightforward framework that shows how exchange rate management by China's central bank affects China's fast growing output, expenditure, employment, and trade balance, while simultaneously influencing these aggregates in its slower growing industrialized trading partners. This framework reveals that under conditions of limited private capital mobility an inflexible yuan yields higher short-run output gains for China at trading partners' expense through a form of ''exchange rate protection.'' At the same time exchange rate misalignment limits China's consumption and hence living standards. A misaligned currency is also shown to bias international saving and investment flows and is central to any explanation of global imbalances.

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Business Economics

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44

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2

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Applied economics

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