China’s Exchange Rate and Monetary Policy

Recently there have been several efforts by officials of the U.S. government to persuade the government of China to adopt a floating exchange rate for the renminbi (RMB). According to most accounts, the U.S. motivation stems in large part from a belief that the RMB’s value would rise relative to the dollar, thereby making Chinese goods temporarily more expensive in the United States and leading, presumably, to a temporary reduction in China’s bilateral trade surplus with the United States. Thus it is likely that what these government officials actually desire is a RMB appreciation, not a floating rate. Such a movement would perhaps be popular with U.S. manufacturers of export goods and with some trade unions. For the U.S. government to base its position regarding Chinese policy on such domestically- motivated and short-term considerations is, however, antithetical to free market principles that stem from economic analysis and which our government usually promotes (at least nominally).