Business Economics

, Volume 44, Issue 2, pp 80–86

Is China's Exchange Rate Policy a Form of Trade Protection?

  • Anthony J Makin
Article

DOI: 10.1057/be.2008.8

Cite this article as:
Makin, A. Bus Econ (2009) 44: 80. doi:10.1057/be.2008.8

Abstract

This paper examines how China's heavily managed exchange rate contributes to its huge trade surplus with its major trading partners, most notably the United States. Based on the distinction between economies’ aggregate output and expenditure and on the premise that exchange rates are shared variables, it develops a straightforward framework that shows how exchange rate management by China's central bank affects China's fast growing output, expenditure, employment, and trade balance, while simultaneously influencing these aggregates in its slower growing industrialized trading partners. This framework reveals that under conditions of limited private capital mobility an inflexible yuan yields higher short-run output gains for China at trading partners’ expense through a form of “exchange rate protection.” At the same time exchange rate misalignment limits China's consumption and hence living standards. A misaligned currency is also shown to bias international saving and investment flows and is central to any explanation of global imbalances.

Keywords

Chinaexchange ratetrade protectiontrade imbalancefixed exchange rate

Copyright information

© Palgrave Macmillan 2009

Authors and Affiliations

  • Anthony J Makin

There are no affiliations available