Remarks on China’s Currency MisalignmentCongressionally.ppt

Remarks on China’s Currency Misalignment Congressionally Mandated Trade Sanctions Arvind Subramanian Peterson Institute for International Economics March 14, 2008 Based on “Undervalued Exchange Rates and Sovereign Wealth Funds: A New Role for the WTO” authored with Aaditya Mattoo, World Bank. Paper available at /publications/interstitial.cfm?ResearchID=871 Summary There is a problem It is a systemic problem Unilateral solution by US undesirable and will be ineffective Multilateral solution through IMF desirable but infeasible Multilateral solution through WTO—with cooperation from the IMF—is desirable and offers the best prospects of feasibility “Houston, we have a problem” The Chinese exchange rate is undervalued (Cline and Williamson, 2008) Estimates vary but a reasonable one is about 30-35 % (Goldstein and Lardy, 2008) Moreover, current account to GDP in 2007 is 12 % of GDP (==$440 billion versus US trade deficit of $700 billion) Estimates of Chinese Undervaluation Systemic Problem Not just the U.S but.. EU, now reeling from euro appreciation: Chorus for anti-dumping actions against China Brazil, Mexico, India, Turkey, and South Korea affected significantly Indian Prime Minister and Finance Minister called for greater exchange rate flexibility in China Unilateral Trade Sanctions by US Doubtful legality: Current WTO rules do not permit trade sanctions against undervalued exchange rates Determining undervaluation is a fraught exercise, making unilateral determinations more suspect/less credible But CV and anti-dumping would not address problem of “import tax” aspect of undervalued exchange rates and competition in third markets Ineffective: Numerous but aborted legislative initiatives Unsuccessful efforts by Administration Underlying reason: China too big even for US acting alone? Corporate America is ambivalent about China’s exchange rate Hence, need for cooperative action Cooperative Action in IMF? Desirable in principle But difficult