Pressure on China today to push up the value of the yuan against the dollar is eerily similar to the pressure on Japan 30 years ago to make the yen appreciate. Back then, “Japan bashing” came to mean the threat of US trade sanctions unless Japan softened competitive pressure on American industries. By 1995, the Japanese economy had become so depressed by the overvalued yen ( endaka fukyo ) that the Americans relented and announced a new “strong dollar” policy. Now “China bashing” has taken over, and the result could be just as bad, if not worse.
By 2000, China’s bilateral trade surplus was as large as Japan’s; by 2004, it was twice as large. Whereas Japan bashing included “voluntary” restraints on exports that threatened US heavy industries, where lobbies were concentrated and politically potent, recent Chinese exports have mainly been low- to middle-tech products of light industry. Thus, China bashing primarily means pressure to revalue the yuan. However, this demand is as unwarranted now as was pressure on Japan to make the yen appreciate.
The financial press and many influential economists argue that a major depreciation of the dollar is needed to correct America’s external deficit. But the US current-account deficit – about 6% of GDP in 2004 and 2005 – mainly reflects a new round of deficit spending by the US federal government and surprisingly low personal savings by American households (perhaps because of the bubble in US residential real estate).
Moreover, the cure can be worse than the disease. Sustained appreciation of a creditor country’s currency against the world’s dominant money is a recipe for a slowdown in economic growth, followed by eventual deflation, as Japan found in the 1990’s – with no obvious decline in its large relative trade surplus. In a rapidly growing developing country whose financial system is still immature, introducing exchange-rate flexibility in order to insulate domestic macroeconomic policy from the ebb and flow of international payments, as the IMF advocates, is an even more questionable strategy.