RMB is not cause of US trade deficit
Some US senators have recently blamed China for the Sino-US trade deficit hitting a new high last year and have proposed placing a 27.5 per cent tariff on all Chinese products if China does not revalue the yuan.
They believe that if China had appreciated its currency, the US deficit problem would have been solved. But it is unfair to blame China when one considers the following facts.
Does China export too many products to the United States? No. According to US statistics, since 1994 Canada has been the biggest exporter to the United States. In 2004 Canada's exports to the United States amounted to US$ 256 billion, 30 per cent greater than China's. The second and the third largest exporters to the US market were Japan and Mexico before 2003. China became the second largest after 2003.
The reason why the trade gap between the United States and China is so big is that US exports to China are far less than those sent to Canada, Mexico and Japan.
The Chinese Government has not manipulated its currency exchange rate to limit imports from any country, including the United States. According to Chinese customs statistics, China had a trade surplus of about US$32 billion in 2004. Considering US trade statistics, it could be implied that China had a huge trade deficit of US$130 billion with the rest of the world. In 2004 China's imports from Asia accounted for about 66 per cent of its total imports, while imports from the United States were only 8 per cent of the total. China had huge trade deficits with South Korea, Japan, and ASEAN nations. Plus the mainland's trade dificits with its island province of Taiwan, the total reached about US$127 billion.
Since China opened to the outside world in 1978 and has been shifting from a planned economy to a market economy, more and more foreign direct investment (FDI) has come into China. The import and export conditions in China have changed a lot. Foreign-funded companies in China have driven the main part of the Chinese import and export markets. In 2004, import and export values of foreign-funded companies accounted for about 60 per cent of the country's total trade volume.
FDI in China mainly came from Asian markets, such as those in Japan, South Korea, Singapore as well as from Taiwan, which realized FDI of US$16.8 billion in 2004, nearly 50 per cent of the country's total (except FDI from Hong Kong and the Virgin Islands).
Those overseas-funded companies aimed their money at not only the rapidly growing Chinese market with its 1.3 billion consumers but also at the country's lower labour costs.
In 2003, US high-tech exports to China were 10 per cent of the Chinese total high-tech imports, ranking as just the fifth largest source of China's imports of such goods.
The conclusion is clear: The reason for the US trade deficit with China is not about China's currency exchange rate. The key problem is some American policies which cause US manufacturers to lose their comparative advantages to other exporters.
If the United States truly wishes to compete on a fair and open playing field, it should review its policies, including its erroneous trade policies regarding China, rather than simply making China a scapegoat. To place tariffs on all Chinese products will only hurt the interest of both countries.