The American government was about to declare China an exchange rate-manipulating country, but, in the face of continuing bilateral negotiations, the American Treasury decided to postpone the decision, probably because it expects China to yield somewhat, as it did in 2005. In that year the United States Senate voted for a 27.5% increase in tariffs on imported goods from China; this, however, did not take place only because in the years following it China allowed for a 20% appreciation of the renminbi. However, since it once again pegged its currency to the dollar during the crisis, the pressure is back.
The trade deficit between the United States and China has been falling since 2008. Even so, eminent economists such as Paul Krugman and Martin Wolf are convinced about the depreciated nature of the renminbi. Wolf lists four dissenting arguments: “first, while the intervention is huge, the distortion is small; second, the impact on the global balance of payments is modest; third, global imbalances do not matter; and, finally, the problem, albeit real, is being resolved” (Valor, 7 April 2010). However, none of those arguments that the Financial Times columnist later sought to refute is relevant. The basic fact is: China has a trade deficit, not surplus, with the other dynamic Asian countries. Therefore, if the renminbi is artificially undervalued, so are its neighbours’ currencies.
What analysts do not understand when they observe the huge current account surpluses of the oil-exporting countries and of the dynamic Asian countries, including China, is that the surpluses derive from these countries’ need to neutralize the Dutch disease: that is, to neutralize the chronic overvaluation of their exchange rate. In the case of the Asian countries, the Dutch disease derives, not from abundant and cheap natural resources, but from the combination of low wages and high wage dispersion between plant engineers and blue-collar workers, as compared to rich countries. Since the exchange rate is determined by the cheaper goods, if the country facing this problem does not manage its exchange rate, it will be determined by those industrial goods (fabrics, for instance), and will preclude the production of sophisticated industrial goods, which require more skilled personnel, higher wages, and high value-added per capita.
The Dutch disease is a market failure compatible with the long-term equilibrium of a country’s current account. This is the reason why a country affected by the Dutch disease, but intends to industrialize and reach increasingly higher levels of industrial sophistication, should necessarily manage its exchange rate in order to shift it from the level of current account equilibrium to the “industrial equilibrium”. If the country succeeds in this task (which is not easy), it is bound to present a current account surplus. This is what is happening with the dynamic Asian countries.
From this analysis, a surprising consequence ensues. As more developing countries become aware of their Dutch disease, they will try to neutralize it and, if they are successful, will achieve current account surpluses. Therefore, despite the fact that the stock of capital is much higher in rich countries, what we will increasingly see in the near future is developing countries presenting high current account surpluses and investing in rich countries or lending money to them.
(This article appeared in www.bresserpereira.org.br on 12 April 2010)