The RMB Appreciation And Its Impacts On The Sino-US Trade Imbalance

Since 2003, due to the growing trade deficit and economic imbalance of US, the appreciation of the RMB has become one of the most important topics of debate in Sino-US trade issues. United States holds the view that China's exchange rate policy is the main reason of the US international trade imbalances, which means that the RMB is significantly undervalued which make China has unfair competitive advantages, and US government continues to put pressure on China to urge China's government to significantly revalue the RMB. In July 2005, China announced a 2.1% appreciation of the RMB, and started to implement the "crawling peg" currency regime, one of the floating exchange rate systems.Can RMB appreciation reduce the US trade deficit? How do the US and Chinese governments deal with the RMB appreciation issue when they consider their interests respectively? For answering these questions, this paper adopted co-integration test, and analyzed the political factors related to the RMB appreciation. Firstly, after analyses of the deficit vs. surplus goods in Sino-US trade, the author adopted monthly data from January 2001 to June 2010 to analyze the relationship between trade volume of different kinds of goods and the nominal RMB exchange rate. The results show that, in general, appreciation of RMB can reduce the US trade deficit with China, but the empirical results also show that this relationship has certain impacts in short term, but has little effect in the long term. In addition, the results also indicate that the US trade deficit is not simply determined by the changes of RMB exchange rate, but also by other factors, for example, inflation in both countries would undermine the effects of RMB to reduce US trade deficit with China. Furthermore, China's surplus goods with the US will be still impacted by the RMB appreciation in short term. Finally, from the perspective of political analysis, the author analyzed the roles of the interest groups and the governments in the United States and the considerations of Chinese government regard to the RMB issue. The author argues that American interest groups played a more important role than its Chinese counterparties in government decision-making on currency issues. What's more, American government weighed the pros and cons between the America's interest and its political stability, and the two governments will maintain a cooperative attitude to balance interests of both countries on the RMB exchange rate issue.