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Policy Brief 10-20
Renminbi Undervaluation, China's Surplus, and the US Trade Deficit
[pdf]
William R. Cline
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The impact of China's exchange rate on both its current account balance and the US-China bilateral trade balance is considerable. A 1 percent rise in the real effective exchange rate would cause a reduction in China's current account surplus of 0.30 to 0.45 percent of GDP. A 10 percent real effective appreciation would bring China's current account surplus down by roughly $170 billion to $250 billion annually with a corresponding improvement in the US current account balance ranging from $22 billion to $63 billion annually. William R. Cline also warns that the increasing trend for China's current account surplus, combined with the negative trend for the US deficit, indicate that adjustments accomplished through exchange rate correction at any one time will have a tendency to erode unless the renminbi successively appreciates by around 2 percent annually to reflect its rapid productivity growth. Special Chinese efforts to shift the economy away from external to domestic demand are important complements of exchange rate adjustment, without which the long-term trend toward a rising trade surplus could cause excess demand to grow and increase inflationary pressures on the economy.
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Read full policy brief [pdf]
>> Read WSJ analysis of this policy brief
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Op-ed
High Prices Will Fix What Politicians Cannot
Trevor Houser
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The reality of a high oil price may be about to change America's petroleum habits even if policymakers cannot. While funding for clean-energy research was initially spurred by skyrocketing oil prices in 1979, the drop in oil prices that followed curtailed attempts to reduce America's oil consumption. By the late 1990s, spending on clean-energy research fell by more than 75 percent from its peak. Even when oil prices rose again in 2003, the specter of the 1980s oil crash has seemed to inhibit investment.
The difference today is that oil prices are unlikely to fall. Demand for oil is driven by economic growth, primarily in emerging economies, and China in particular. Since 2007, demand in the developing world has increased 10 percent. As a result, oil has stayed expensive, in spite of the worst economic downturn since the Great Depression. Today's oil markets make public investment in clean-energy research and development more palatable. However, in the absence of good policy from Washington, clean-energy deployment driven by a tight oil market will be slower and more limited.
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Read full op-ed
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PIIE Noted in the News and on the Web
Wall Street Journal
PIIE Estimates on Renminbi Revaluation Useful to Policy Debate
Bob Davis of the Wall Street Journal examines William R. Cline's latest policy brief [pdf] in which he estimates that a renminbi depreciation would reduce the US current account deficit by $22 billion to $63 billion. Davis suggests that Cline's estimates could play a role in upcoming trade legislation.
Washington Post
Bloomberg: Lardy Sees Most of China Avoiding "Big" Housing Decline
Nicholas R. Lardy talks with Bloomberg's Scarlet Fu about China's housing and banking industries. China's banking regulator told lenders last month to conduct a new round of stress tests to gauge the impact of residential property prices falling as much as 60 percent in the hardest-hit markets.
Business News Network
State of the US and Global Economy
Business News Network interviews Edwin M. Truman on inflation, stimulus, unemployment, and the state of the US and global economy.
C-SPAN
A Status Report on the US Economy
Simon Johnson testifies before the Senate Budget Committee hearing "A Status Report on the US Economy."
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