The Real Problem With Global Trade: How China’s Currency Manipulation Is Warping the World Economy

SS:

* The deliberate undervaluation of Asian currencies, particularly China’s artificially suppressed renminbi, is the primary driver of massive and unsustainable global trade surpluses in East Asia.
* China successfully circumvents existing U.S. tariffs by routing goods through neighboring Asian countries, which in turn actively weaken their own currencies to maintain export competitiveness.
* Despite the severe economic threat to U.S. and European manufacturing sectors, G-7 leaders and institutions like the IMF consistently avoid addressing currency manipulation or engaging in currency diplomacy.
* Current international economic policymakers dismiss the impact of exchange rates on trade, ignoring successful historical interventions, for instance the 1985 Plaza Accord, that utilized coordinated currency adjustments to correct vast trade deficits.
* To effectively resolve the global trade crisis, the G-7 must abandon its current passive stance and present Beijing with a definitive choice: allow the renminbi to appreciate or face coordinated international tariffs.

Full Text:

As the Group of Seven meets in Évian, France, beginning June 15, French President Emmanuel Macron has pushed to bring about a broad recognition that rising trade imbalances are a global economic problem. But G-7 leaders will nevertheless likely ignore one of the most important sources of those imbalances: the undervaluation of the currencies of Asia’s large economies, especially China’s.

This is unfortunate. There is a growing consensus that Asia’s trade surplus has grown too big. But without discussion of currency undervaluation, there is little chance that the G-7 can mount a meaningful effort to change the policies that have given rise to these imbalances. In 2021, when China’s property bubble collapsed, it weakened the renminbi, which helped Beijing’s pivot to export-led growth. The currency’s reduced value made Chinese goods cheaper for foreign buyers, and foreign goods more expensive in [China](https://www.foreignaffairs.com/regions/china). Weak growth in demand, a falling currency and widespread industrial subsidies have led China’s overall trade surplus to triple since 2018. Moreover, Chinese state banks and other state institutions are now giving China’s exporters an artificial edge in foreign markets by holding China’s currency down.

U.S. President Donald Trump’s tariffs were meant to slow China’s export juggernaut. But it has not worked out that way. Rather than assembling its own parts for shipment direct to the [United States](https://www.foreignaffairs.com/regions/united-states), China now ships intermediate goods—often high-tech components—to neighboring countries for final assembly, thus sidestepping tariffs. To keep their own exports competitive and workers in their manufacturing sectors employed, many of China’s neighbors have felt compelled to keep their own currencies weak. Indeed, several other Asian currencies are at historic lows against the dollar.

These rising imbalances in global trade are as much a problem for Europe as for the United States. Europe’s automotive, chemical, steel, and machine-tool industries are on the frontline of this so-called second China shock. This is why [Macron](https://www.foreignaffairs.com/tags/emmanuel-macron) has made global trade imbalances a major theme of this year’s G-7. But in Europe, as in the United States, there is still a reluctance to make currency diplomacy integral to the broader trade discussion. This is an intellectual and policy blind spot that risks a failure of economic policy coordination. As long as it persists, trade imbalances will only grow. This situation is unsustainable. The G-7 must present Beijing with a choice: it must allow its currency to appreciate, or it must face new trade restrictions.

TRADING TROUBLES

Large surpluses and large deficits create financial risks as well as trade tensions. To address these problems, G-7 finance ministers have agreed to a minimal communiqué that does little more than highlight the “common interest” that surplus and deficit economies share in bringing down persistent trade imbalances. But they did not press for a change of China’s exchange rate policy. Moreover, the G-7’s call for yet another IMF report on the underlying drivers of imbalances are unlikely to persuade Beijing to move away from its current reliance on exports to achieve growth targets that it cannot meet from domestic demand. Chinese think tanks, state media, and officials still attribute its rising surplus to its comparative advantage in new industrial sectors.

The United States, meanwhile, appears to have lost interest in an agenda that would try to facilitate a simultaneous reduction in trade surpluses and deficits. U.S. Treasury Secretary Scott Bessent’s early talk of a grand global economic reordering has disappeared into a world of communiqués that promise “constructive strategic stability.” Beijing likely understands this to mean that Washington will not demand major changes to its current set of economic policies. Bessent’s initial ambition to bring the fiscal deficit, which is once again trending back above six percent of GDP, down toward three percent seems to have vanished. The administration is instead celebrating a surge in AI-related capital goods imports that is likely to push the U.S trade deficit even higher.

Against this backdrop, a strange disconnect has emerged, as the recognition of a growing problem has not translated into support for the most obvious solution. Economists across the ideological spectrum recognize that China’s scale, its technological sophistication, and the yawning gap between its rapidly growing exports and its stalled imports have created a profound challenge to the world’s other manufacturing powers. Similarly, few would challenge the proposition that reliance on China for critical inputs creates an important strategic and economic vulnerability. Indeed, there is even a grudging acknowledgment in Washington—though less so from the IMF—that Beijing’s mix of central government support and subsidies from competing local governments has been effective in mastering and scaling the production of cutting-edge technologies.

And yet the consensus does not extend to recognizing the need to end deep currency undervaluations—notwithstanding the fact that ending them is the one policy change that would directly bring balance to global trade. International economic policy decision-makers seem to be studiously avoiding any commitment to macroeconomic coordination or talk of exchange rate policy, and instead maintain that cooperation should be limited to each country making its best individual efforts to pursue appropriate monetary and fiscal policies.