The U.S.-China Trade Balance and the Theory of Free Trade: Debunking the Currency Manipulation Argument

Anwar Shaikh () and Isabella Weber ()
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Isabella Weber: Institute of Management Studies, Goldsmiths University of London

No 1805, Working Papers from New School for Social Research, Department of Economics

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 degree and kind of RMB misalignment. We argue that this is not a consequence of poor measurement but of theory. The conventional principle of comparative advantage suggests real exchange rates will adjust so as to balance trade. Therefore, the persistence of trade imbalances tend to be interpreted as arising from currency manipulation. In contrast, the Smithian-Harrodian theory explains trade imbalances as the outcome of free trade and sees unequal real competitiveness as the root cause of the U.S.-China trade imbalance.

Keywords: China; free trade; terms of trade; purchasing power parity; exchange rate misalignment (search for similar items in EconPapers)
JEL-codes: B17 F10 F31 F32 F60 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2018-05, Revised 2019-12
New Economics Papers: this item is included in nep-cna, nep-int and nep-pke
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http://www.economicpolicyresearch.org/econ/2018/NSSR_WP_052018.pdf First version, 2018 (application/pdf)

Related works:
Journal Article: The U.S.–China trade imbalance and the theory of free trade: debunking the currency manipulation argument (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:new:wpaper:1805

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