…we do not know accurately the size of China’s surplus because, in an attempt to circumvent exchange controls, there is over-invoicing of exports and under-invoicing of imports – part of speculative flows. The large import content of China’s exports, particularly to America, mean that China’s competitiveness will be little affected. Economists disagree about whether the import content for exports to America is 70 per cent or 80 per cent but, whatever the number, it means that the effective appreciation was almost certainly under 1 per cent. In the case of a larger revaluation, Chinese companies would probably respond to the loss of competitiveness by cutting margins, reducing further the effect of the revaluation. This revaluation – even if followed by further moderate ones – is likely only to slow the rising tide of China’s exports slightly.
But whether this, or a succession of revaluations, eliminates China’s trade surplus will have little effect on the more important problem of global trade imbalances, and particularly on the US trade deficit. Much of China’s recent gains in textile sales, for instance, after the end of quotas last December, came at the expense of other developing countries. America will once again be buying from them, and so total imports will be little changed.
Wise words, although I disagree with Stiglitz’s pessimism about U.S. living standards (see the link) and the apparent claim that China does not much need the U.S..