How Much Does China's Exchange Rate Affect the U.S. Trade Deficit?

American politicians claim that the Chinese exchange rate with the U.S. dollar is a major cause of the huge U.S. trade deficit. This article examines the issue by asking the following questions: How has the United States been able to run a growing trade deficit with the world since the late 1970s? Is the Chinese currency or exchange rate the cause of the large U.S.-China trade deficit? What factors are behind the huge U.S.-China deficit? Theoretical and empirical analyses suggest that the U.S. trade deficit is a result of the unique position of the U.S. dollar as the reserve unit of currency in the international monetary system. The deficit cannot be attributed to the Chinese exchange rate, because it does not fall (in fact it rises) as the Chinese currency appreciates. The factors causing the deficit include relocation of exports to China from elsewhere in Asia, measurement differences, overcounting Chinese exports to the United States while undercounting U.S. exports to China, American consumption without saving, and U.S. restriction of high-tech exports to China. The resulting policy implication is that the U.S. trade deficit would not be reduced very much by a change in the Chinese exchange rate unaccompanied by efforts in regard to the other factors.