With the American consumer only beginning to really open up her wallet, the US recovery depends in part on the willingness of other customers -- that is, foreign customers -- to buy our machines and hire our consultants. To that end, many trade economists and journalists have suggested that one big thing stands in the way of the United States being competitive overseas: China's currency manipulation, which artificially suppresses the price of the RMB, moving manufacturing overseas while keeping their citizens too poor to buy expensive US goods.
But as Uri Dadush writes, a stronger Chinese currency might hurt the United States in the short run, even as it helps China and other low-income countries. Why? Because stronger Chinese currency means the price of China's imports will rise, exacerbating our trade deficit:
The US and Italy are in a less favourable position because their imports from China are about three to four times larger than their exports to China. As a result, they are likely to be significant net losers from renminbi revaluation and see their bilateral trade deficit with China widen unless offset by a substantial acceleration in China's growth. The rise in the price of their imports from China (consumed widely and disproportionately by low-income households) will outweigh the profit-enhancing effect of the rise in the price of their more sophisticated exports to China.
Moreover, in both the US and Italy, the widening of the bilateral trade deficit with China may become permanent because neither import nor export volumes are likely to react enough to offset the large terms-of-trade deterioration.
Read the full story at VoxEU.