This year it seems that America is well on its way to an $800 billion trade deficit, and according to many Americans the root of the problem is China. Complaints that rise all the way to the uppermost echelons of the American hierarchy - the United States Senate - bemoan currency pegs that have given Chinese exporters low labor wage commitments and unrealistic pricing capabilities.
Ultimately, China's projected current-account surplus this year clocks in around $100 billion, forcing the question of whether or not it is fair to blame the majority of America's current-account deficit on Beijing.
Should the bulk of the United States' trade woes be placed on China?
Yes and no.
China's share of global gross domestic product (GDP) is enormous: since 2000, China has contributed nearly twice as much to global GDP growth as the next three largest emerging economies combined (India, Brazil and Russia). Correspondingly, 75 percent of China's GDP is composed of its trade in goods and services, compared to many other developing economies which have rates that hover around one-third of that.
Beijing's economic decisions affect not only the prices of manufactured good but also interest and inflation rates, the housing market and wages in the United States.
But it is important to consider the other factors contributing to America's deficit. The absence of adequate domestic savings is arguably the main cause. So while China exports cheap merchandise to America, we export blame for our economic shortcomings on China.
The rise of the Chinese economy may have lent itself to a drop in American inflation. Cheap production in the People's Republic has kept the prices of manufactured goods low, easing the rise of inflation. A study by Dresdner Kleinwort Wasserstein, quoted recently in The Economist, substantiated that the prevalence of the "Made in China" stamp on American shelves shaved an entire percent off America's inflation rate.
It is China's vast and cheap manpower, coupled with low barriers of entry, that are most worrisome to the American protectionist. When it comes to factories, production and taxes, America just cannot win against the developing giant. But when it comes time to purchase these goods, consumers actually benefit from lower prices created by productive efficiency and an artificially low exchange rate.
The recent decision in Beijing to adjust the decade-long peg of the yuan to the dollar has eased many protectionist grudges. Instead of fixing the yuan to the dollar, China created a basket of currencies. The yuan appreciated 2.1 percent comapred to the U.S. dollar, and has been permitted to float within a narrow band. This may have been a political move to suppress American protectionism, though it seems China is slowly trying to land its economic growth without a meltdown.
This revaluation may not be 100 percent advantageous to the American population. Differences may be noticed in the prices of goods and services for China, and more conspicuously, with those that would have been. To keep the yuan effectively pegged to the U.S. dollar, China had been the largest consumer of American treasury bonds. With the revaluation, China may be less inclined to invest so greatly in our government's treasury, and thus finance our spending.
For now, the protectionists may sleep a little more comfortably - whether it was catalyzed by their pressure or not - knowing that there have been some Chinese economic reforms. Speculation will be ripe during the coming months as the effects of the revaluation slowly come about.
China's role in the American economy is a multi-branched tree. Its responsibility for the American current-account deficit should not be blown up, and blame given to domestic policy should correlate. Ultimately, we just have to wait and see whether the blame given to China will be justified by the effects of the revaluation.
