Chinese mercantilism, centered on currency manipulation, is a fraught, even taboo topic. It provokes intense arguments related to free trade, as well as uncomfortable recognition of America’s new interdependence with —or dependence on—China. Yet the issue is vital for understanding U.S. economic performance. Neither the Bush nor Obama administrations worried much about China’s intervention in support of its trade advantage, but in the 2016 election, trade issues and the collapse in U.S. manufacturing employment figured prominently.
Economists estimate that China’s currency was undervalued against the dollar by 30 percent from 2003 to 2013. By intervening massively in currency markets—up to $2 billion a day in 2007—China kept the yuan priced artificially low. This was tantamount to a form of mercantilism—intensive government intercession in support of maintaining a trade surplus—using a cheapened currency, which achieves an attractive price for export goods while keeping prices high for imports. Though many argue about Beijing’s actual motives, China ran a trade surplus at nearly 10 percent of GDP, while the U.S. floundered during the financial crisis.
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