How Would an Appreciation of the Renminbi Affect the U.S. Trade Deficit with China?

Abstract

The U.S. trade deficit with China exceeded $200 billion in 2005. Many blame these imbalances on the value of the renminbi. This paper investigates how an appreciation of the RMB would affect the U.S. trade balance with China. Johansen MLE and dynamic OLS results indicate that the long run real exchange rate coefficients for nominal exports and imports between China and the U.S. equal approximately unity, implying that the true price elasticities of demand are higher. In addition, many believe that a Chinese revaluation will lead to a generalized appreciation of Asian currencies that could substantially impact China's processed exports. Thus an appreciation of the renminbi would help to rebalance trade between China and the U.S.