Asian Competitive Devaluations

Paper examine three issues. The first is the path of China's nominal and real exchange rates since 1990. As it turns out, this is more complicated than is commonly assumed, with basic results exhibiting sensitivity to the exchange rate measure used. We conclude that while China did experience a large nominal depreciation, its much higher relative inflation eroded this devaluation, and in real terms the reminbi has actually appreciated during the 1990s. The Chinese devaluation was at best a contributing factor to the Asian financial crises, not their primary cause. The second issue we examine is the impact of exchange rate changes to date on world trade. Using a computable general equilibrium (CGE) model we simulate the series of devaluations which have occurred throughout Asia and generate estimates of the impact of these exchange rate changes on the volume and partner country and sectoral composition of world trade. In the case of the US, for example, we find that the exchange rate changes to date could add more than $50 billion to the US trade deficit. The impact would be felt throughout the traded goods sector, with the light manufacturing and machinery sectors hit particularly hard. With respect to China, we find that a modest 5-10 percent devaluation of the reminbi would be sufficient to re-establish the status quo ante in light of the recent devaluations elsewhere in the region. At the same time, given the relatively minor impact on China of the events observed thus far, and the likelihood that a devaluation in China could spark another round of financial turbulence in the region, this result surely argues for restraint on the part of the Chinese. Finally, we apply the results of these simulations to econometric models of trade conflict. We find that the projected trade flow changes will increase the likelihood of bilateral friction between the US and its Asian trade partners. The impact may be felt acutely in Korea, where we estimate that the results in train significantly increase the likelihood of formal US trade actions against Korea. At the same time, the growing ependence of the region on the US market will increase the likelihood of disputes being resolved in ways satisfactory to the US. [author]