On the U.S.-Chinese trade dispute

This article deals with three propositions pertaining to U.S.-Chinese dispute over the trade imbalance between them: that the Chinese currency is undervalued, that this undervaluation is the cause of the trade imbalance, and that Chinese policies are immoral and illegal according to International Monetary Fund (IMF) and World Trade Organization (WTO) rules. It is argued that the Chinese currency may or may not be undervalued, that China is price-competitive for reasons unrelated to the exchange rate, and that Chinese policies are legitimate and do not violate the IMF or WTO rules. The empirical results show that the trade balance is more closely related to the terms of trade than to either the nominal or the real exchange rate. This means that a major source of correction for the trade imbalance would be the correction of the terms of trade.