(Yicai Global) May 9 -- Given the expectation of US fiscal stimulus and Federal Reserve interest rate hikes, a strengthening dollar index will lead to increased pressure on China to adjust the yuan's exchange rate, according to the CF40-PIIE Joint Report 2017, published at a symposium for economists at the China Finance 40 Forum and Peterson Institute for International Economics on May 7.
The American government is likely to assess exchange rates to see if countries with a trade surplus against the country have misaligned rates, the report said, adding that the risk of growing trade frictions cannot be ignored.
Historically, the US has repeatedly demanded that economies with a trade deficit against the US strengthen their currencies, but to little avail. This is because America's trade deficit is determined by its savings and investment structure, the report added, saying that the increasing international movement of capital has played an important role in exchange rate volatility and goods trade balance should not be the focus of exchange rate policies.
The two countries should reinforce coordination and cooperation to avoid substantial fluctuations in the foreign exchange market, the report said, adding that there is already a foundation for the two countries to harmonize their exchange rate policies. Neither of the pair is happy to see the yuan's exchange rate under fire. The US shouldn't resort to unilateral measures or force other countries to rely on exchange rate policy, which is a tool to adjust the quantity and solve bilateral trade imbalances.
China, America's largest source of trade deficit, contributed to 46 percent of the nation's goods trade shortfall last year. Some economic theories suggest that bilateral trade balance is not a direct measure of one country 'winning or losing' trade relations with another country, but Trump's administration is concerned about trade deficits and may seek a competitive edge over Chinese companies by increasing the use of trade remedies and even bending World Trade Organization rules, the report said.
The current account structures of both nations are determined by domestic savings and investment structure, while trade policies have very limited effect on addressing economic structural issues, the report added. High trade barriers to stop Chinese companies entering the US will only shift its trade deficit with China to other countries, and result in lost efficiency and public welfare. Trade wars will not only end badly for both countries, but will affect the global economy.
Speeding up structural reforms and further opening up markets is the best strategy to avoid trade frictions, the report proposed.