...the real victims of this policy are other emerging market and developing countries – because they compete more closely with China than the US and Europe, whose source of comparative advantage is very different from China’s.
In fact, developing countries face two distinct costs from China’s exchange rate policy.
In the short run, with capital pouring into emerging market countries, their ability to respond to the threat of asset bubbles and overheating is undermined.
Emerging market countries such as Brazil, India and South Korea are loath to allow their currencies to appreciate – to damp overheating – when that of a major trade rival is pegged to the dollar.
But the more serious and long-term cost is the loss in trade and growth in poorer parts of the world.
As an illustration, consider production of steel. China continued to increase the production of steel even during the crisis while countries like Ukraine were forced to cut down production by 20-30%:
Dani Rodrik suggests a policy that would be good for the World Economy, while allowing China to grow further:
So there is a simple solution. It is possible to let the renminbi appreciate, and hence
eliminate the trade surplus, as long as complementary policies are put in place to support modern
tradables more directly. Such policies, combined with macroeconomic policies targeted at the
current account, can achieve both external balance and structural change in favor of modern
tradables.
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