Wednesday, May 18, 2005

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The Treasury reports on China

Yesterday, I saw Edmund Andrews' New York Times summary of the U.S. Treasury report to Congress on whether any country is manipulating its exchange rate policy in order to gain an unfair competitive advantage. I naturally thought about blogging it, but then realized all I had to do was wait for Brad Setser to blog about it and link to him.

Which is what I'm doing.

posted by Dan on 05.18.05 at 02:07 PM


always a wise approach.

posted by: praktike on 05.18.05 at 02:07 PM [permalink]

How does maintaining a fixed rate for years give someone a competitive advantage?

posted by: rosignol on 05.18.05 at 02:07 PM [permalink]

a) from a global point of view, China's exchange rate has not been fixed. It has moved v. the dollar. So (leaving aside the mini-rally v the euro recently) it has trended down v. most of the world. Shock of all shocks, China's exports started to balloon after the dollar stopped rising. See the world bank.

b) from the US point of view, Chinese productivity has been growing quite fast, if for no other reason that China is investing a ton, and each unit of labor now comes with more capital. This normally leads to a real exchange rate appreciation over time -- China's external purchasing power should grow in line with China's growing productivity/ expanding economy/ greater capacity to produce. That can happen if Chinese inflation is higher than US inflation, or if China's exchange rate rise v. the $. Neither has happened. Real exchange rates could also adjust if US wage and price levels fell toward chinese levels, but that generally is not much fun. Read Jeff Frankel on this -- his paper is a bit dense, but he notes that China's global purchasing power is now well below what one would expect given Chinese productivity growth.

Dan -- thanks for the plug

posted by: brad on 05.18.05 at 02:07 PM [permalink]

Dan is lazy. In a very sophisticated kind of way.

posted by: Keith on 05.18.05 at 02:07 PM [permalink]

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