This paper analyzes a hot topic: the influence of an undervalued currency on
macroeconomic variables - primarily on the economic growth and trade balance
of a country, but also on employment, foreign exchange reserves, competition,
and living standards. It also reviews and explains the consequences of yuan
undervaluation, points out the need for its appreciation, and states the
negative effects that stem from this measure. Special attention is given to
the problematic bilateral relations between China and the USA and the reasons
why Americans are worried about the exchange rate policy that China
implements. Although yuan appreciation would decrease the American foreign
trade deficit, it also raises the question of further financing of the
American deficit. There are also other problems that the possible
appreciation would cause for the American economy, due to the effect of
J-curve, passthrough, larger costs of input imported from China, etc.
Therefore, Chinese foreign exchange policy is an important subject, but it is
not the solution to the problems of the global economy - which have deeper
roots than that. However, there is no excuse for China implementing unfair
exchange rate policies, or replacing such policies with controversial
protectionist policies (as some authors have suggested).
Real Exchange Rates And U.S. Bilateral Trade