US should not blame deficit on China's currency policy

The so-called Chinese "currency manipulation" is some Americans' favorite scapegoat for the United States' large trade deficit and anemic job growth, but export growth is actually determined primarily by factors other than exchange rates, a renowned U.S. economist pointed out on Tuesday.

When things are not going well, it is common to seek scapegoats. In this vein, populists of various stripes allege that China manipulates the value of its currency to favor its exports and undercut American workers, particularly in manufacturing, noted Edward Lazear, former chairman of the U.S. President's Council of Economic Advisers.

"The reality is that the value of China's yuan in terms of dollars is not the major reason why China exports over three times as much to us as we do to them. Its exchange rate is a minor source of weak U.S. job growth," Lazear wrote in an article published on Tuesday on The Wall Street Journal.

From 2005 to 2008, the value of the yuan relative to the U.S. dollar appreciated by about 21 percent, but China's exports to the United States continued to grow at averaging 18.2 percent per year, he noted.

The only period during which exports from China to the United States fell to any significant extent was during the recent recession, dropping by about one-third from late 2008 to early 2010. The dollar-yuan exchange rate was unchanged throughout this entire period. So the obvious explanation for the decline in Chinese exports to the United States was the decline in demand for consumption goods in general, Lazear observed.

The growth of trade between China and the rest of the world not only contributed to China's growing economic size, but the reverse is also true. Rapid economic growth made China a larger target for and source of traded goods, said Lazear, a professor at Stanford University.

China's choice of exchange rate policy is not the source of China's export growth. Disappointing job and wage growth in the United States has "much more to do with our economic policy" than with the value of China's currency, he stressed.