Is Chinese Mercantilism Good or Bad for Poor Countries?

CAMBRIDGE – China’s trade balance is on course for another bumper surplus this year.  Meanwhile, concern about the health of the US recovery continues to mount. Both developments suggest that China will be under renewed pressure to nudge its currency sharply upward. The conflict with the US may well come to a head during Congressional hearings on the renminbi to be held in September, where many voices will urge the Obama administration to threaten punitive measures if China does not act.

Discussion of China’s currency focuses around the need to shrink the country’s trade surplus and correct global macroeconomic imbalances. With a less competitive currency, many analysts hope, China will export less and import more, making a positive contribution to the recovery of the US and other economies.

In all this discussion, the renminbi is viewed largely as a US-China issue, and the interests of poor countries get scarcely a hearing, even in multilateral fora. Yet a noticeable rise in the renminbi’s value may have significant implications for developing countries. Whether they stand to gain or lose from a renminbi revaluation, however, is hotly contested.

On one side stands Arvind Subramanian, from the Peterson Institute and the Center for Global Development. He argues that developing countries have suffered greatly from China’s policy of undervaluing its currency, which has made it more difficult for them to compete with Chinese goods in world markets, retarded their industrialization, and set back their growth.