Just for fun, let's say that Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke are wildly successful on their jawboning trip to China in mid-December. Although there's no formal announcement, within days, the yuan begins to gradually appreciate against the dollar. Over the next two years or so, it rises some 20 percent against the greenback.
What would be the effect of this revaluation, so eagerly sought by trade-deficit-obsessed Democrats and Republicans? Well, as far as the trade deficitwhich could be around $800 billion in 2006goes, probably not too much. A 2005 study by the Asian Development Bank concluded that such a rise would improve the U.S. trade deficit by around only $10 billion a year, or 5 percent of the $200 billion gap with China.
"The effect of the ... revaluation is unlikely to be sufficient for the necessary adjustment of the U.S. external imbalance," the report concludes.
See, China isn't the whole trade ballgame. Although it may seem as if the Middle Kingdom is a singular trade colossus, in 2005 only 4.6 percent of U.S. exports went to China and just 14.5 percent of imports came from China. Besides China, America runs huge trade deficits with Japan ($82 billion in 2005), Canada ($78 billion), and Germany ($51 billion), among other nations. Even without China last year, the United States would have run a $550 billion trade deficit.
A stronger yuan would also cut the cost of all the imported materials going to China, allowing Chinese producers to sell their wares overseas at even lower prices, blunting the impact of the appreciation. Reduced materials costs and increased Chinese purchasing power might also fuel greater demand for commodities such as copper, iron, and oil, raising prices in all sorts of products for Americans.
"Be careful what you wish for," says Daniel Ikenson, policy analyst at the Cato Institute's Center for Trade Policy Studies. Ikenson also points out in a study that the U.S. dollar depreciated against the Canadian dollar by 23 percent from 2002 to 2005. And what happened to the trade balance between the two nations? Our deficit with Canada expanded 58 percent from $48 billion to $76 billion. As an analysis from the Federal Reserve Bank of Cleveland concludes, "A renminbi revaluation seems an eventual certainty, but betting on how it might affect trade is still risky."
Ultimately, if you're concerned about the trade deficit, then you should be rooting for Americans to spend less and save more, while urgingas Paulson and Bernanke will surely dothe Chinese to save less and spend more. That means the United States needs to grapple with its current and long-term budget problems, while the Chinese need to install the sort of social safety netslike a retirement systemthat encourage their citizens to quit packing away half their income.
And by the way, running trade surpluses is hardly an automatic ticket to economic paradise. Just look at slow-growth Japan and Germany, nations that continually export more than they import.