The U.S.–China trade imbalance and the theory of free trade: debunking the currency manipulation argument
Year: 2020
Type: article
Abstract: The U.S.–China trade imbalance is commonly attributed to a Chinese policy of currency manipulation. However, empirical studies failed to reach consensus on the RMB misalignment. We argue that this is not a consequence of poor measurement but of theory. At the most abstract level the conventional principle of comparative cost advantage suggests real exchange rates will adjust so as to balance trade. Therefore, the persistence of trade imbalances tends to be interpreted as arising from currency manipulation facilitated by foreign exchange interventions. By way of contrast, the absolute cost theory explains trade imbalances as the outcome of free trade among nations that have unequal real costs. We argue that a disparity in real costs is the root cause of the U.S.–China trade imbalance.
Authors: Isabella Weber, Anwar Shaikh
Institutions: University of Massachusetts Amherst, The New School
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2899594091