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  • Author: Nicholas Borst, Nicolas R. Lardy
  • Publication Date: 08-2015
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: China's banking system is now the largest in the world, and its capital markets are rapidly approaching the size of those in the advanced economies. Borst and Lardy trace the evolution of China's financial system away from a traditional bank-dominated and state-directed financial system toward a more complex, market-based system. They analyze and outline the optimal sequence of financial reforms needed to manage the new risks accompanying this evolution.
  • Topic: Economics, Markets, Financial Crisis, Reform
  • Political Geography: China
  • Author: Ryan Rutkowski
  • Publication Date: 01-2015
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: Faced with slowing economic growth, Chinese policymakers now recognize that the service sector of the economy—transportation, communications, finance, and health care—could spur economic activity and employment. The catch is that China must reform these and other areas to accomplish this goal. Chinese leaders have outlined an ambitious agenda for reform, but myriad vested interests could slow or block their plans. This Policy Brief evaluates the steps taken so far and the difficulties that lie ahead in implementing them. If policymakers fail to reform and open up the service sector, they run the risk of seriously impairing China's growth prospects.
  • Topic: Economics, International Trade and Finance, Labor Issues, Financial Crisis, Reform
  • Political Geography: China
  • Author: Jeffrey Schott, Eujiin Jung, Cathleen Cimino-Isaacs
  • Publication Date: 12-2015
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: Of all the free trade agreements (FTAs) concluded by Korea with its major trading partners since the turn of the century, the Korea-China FTA may be the largest in trade terms. It is, however, far from the best in terms of the depth of liberalization and the scope of obligations on trade and investment policies. Korea and China agreed to liberalize a large share of bilateral trade within 20 years, but both sides incorporated extensive exceptions to basic tariff reforms and deferred important market access negotiations on services and investment for several years. Political interests trumped economic objectives, and the negotiated outcome cut too many corners to achieve such a comprehensive result. The limited outcome in the Korea-China talks has two clear implications for economic integration among the northeast Asian countries. First, prospects for the ongoing China-Japan-Korea talks will be limited and unlikely to exceed the Korea-China outcome. Second, Korea and Japan need to strengthen their bilateral leg of the northeast Asian trilateral and the best way is by negotiating a deal in the context of the Trans-Pacific Partnership.
  • Topic: Economics, International Trade and Finance, Politics, Bilateral Relations
  • Political Geography: United States, China, Asia, Korea
  • Author: William R. Cline
  • Publication Date: 11-2015
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: The latest semiannual fundamental equilibrium exchange rate (FEER) estimates find that the US dollar is now overvalued by about 10 percent, comparable to levels in 2008 through early 2010 and again in 2011. Unlike then, the current strong dollar does not reflect a weak renminbi kept undervalued by major exchange rate intervention by China. Instead, China's current account surplus has fallen sharply relative to GDP, and its recent intervention has been to prevent excessive depreciation rather than to prevent appreciation. Additionally, declines in the real effective exchange rates (REERs) for major emerging-market economies and resource-based advanced economies, driven by falling commodity prices in recent months, have strengthened the dollar. Recent increases in the REERs for the euro area and Japan have removed their modest undervaluation identified in the last FEERs estimates in May, and the Chinese renminbi remains consistent with its FEER. The dollar's rise by nearly 15 percent in real effective terms over the past two years could impose a drag of nearly one-half percent annually on US demand growth over the next five years. As the Federal Reserve moves to normalize US monetary policy, it may need to consider a gentler rise in interest rates than it might otherwise have pursued, both to temper possible further strengthening of the dollar in response to higher interest rates and to help offset the demand compression from falling net export
  • Topic: Economics, International Trade and Finance, Monetary Policy, GDP
  • Political Geography: United States, China
  • Author: Li-gang Liu
  • Publication Date: 08-2014
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: China's property market has slowed significantly since the first half of 2014, with sharp declines in sales and a buildup in the inventory of new homes. This sharper than expected downturn—which has affected not only second- and third tier smaller cities but also first-tier megacities such as Beijing, Shanghai, Shenzhen, and Guangzhou—contrasts with last year's buoyant sales and double-digit price surge. Compounded by fears of a default in the shadow banking system and the perception of a highly leveraged Chinese economy, the sudden declines in the property sector are being watched closely. Many commentators believe this could be a turning point for the sector, triggering a hard landing of the Chinese economy and even a financial crisis. Over the last decade, China's property sector has become an important pillar for the country's growth as well as the key source for elevated commodity prices. A property market slump would hurt other sectors, as well as drag down resource-rich economies that rely heavily on China to buy their exports.
  • Topic: Economics, Financial Crisis, Urbanization
  • Political Geography: Japan, China, United Nations
  • Author: Arvind Subramanian, Martin Kessler
  • Publication Date: 08-2013
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This paper describes seven salient features of trade integration in the 21st century: Trade integration has been more rapid than ever (hyperglobalization); it is dematerialized, with the growing importance of services trade; it is democratic, because openness has been embraced widely; it is criss-crossing because similar goods and investment flows now go from South to North as well as the reverse; it has witnessed the emergence of a mega-trader (China), the first since Imperial Britain; it has involved the proliferation of regional and preferential trade agreements and is on the cusp of mega-regionalism as the world's largest traders pursue such agreements with each other; and it is impeded by the continued existence of high barriers to trade in services. Going forward, the trading system will have to tackle three fundamental challenges: In developed countries, the domestic support for globalization needs to be sustained in the face of economic weakness and the reduced ability to maintain social insurance mechanisms. Second, China has become the world's largest trader and a major beneficiary of the current rules of the game. It will be called upon to shoulder more of the responsibilities of maintaining an open system. The third challenge will be to prevent the rise of mega-regionalism from leading to discrimination and becoming a source of trade conflicts. We suggest a way forward—including new areas of cooperation such as taxes—to maintain the open multilateral trading system and ensure that it benefits all countries.
  • Topic: Economics, Globalization, International Trade and Finance, Markets, Treaties and Agreements
  • Political Geography: China
  • Author: Anders Åslund
  • Publication Date: 11-2013
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Emerging-market growth from 2000 to 2012 was untypically high. This paper highlights the many reasons why emerging-economy growth is likely to be lower going forward. Much of the catch-up potential has already been used up. The extraordinary credit and commodity booms are over, and many large emerging economies are financially fragile. They have major governance problems, so they need to carry out major structural reforms to be able to proceed with a decent growth rate, but many policymakers are still in a state of hubris and not very inclined to opt for reforms. They are caught up in state and crony capitalism. Rather than providing free markets for all, the West might limit its endeavors to its own benefit. Economic convergence has hardly come to an end, but it has probably reached a hiatus that is likely to last many years. The emerging economies need to improve their quality of governance and other economic policies substantially to truly catch up. For a decade or so, the West could take the global economic lead once again as in the 1980s.
  • Topic: Economics, Emerging Markets, International Trade and Finance, Monetary Policy, Governance
  • Political Geography: Russia, China, India, South Africa, Brazil
  • Author: Nicholas Borst
  • Publication Date: 10-2013
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: The Chinese financial system has undergone almost continuous reform since the dismantling in the 1980s of the Soviet- style system where only one state-controlled bank existed. Government efforts to create a financial system that adheres to international best practices of commercial lending accelerated in the 1990s (box 1). Reforms progressed quickly during this period, but they were accompanied by excessive credit growth and a massive increase in nonperforming loans, threatening the solvency of some banks and the financial stability of the entire economy. The risk of these weaknesses was dramatized by the 1997 Asian financial crisis, in which several nearby countries were crippled by plunging currency values, rising interest rates and difficulties servicing their foreign-held debts.
  • Topic: Debt, Economics, International Trade and Finance, Markets, Financial Crisis
  • Political Geography: China
  • Author: Joseph E. Gagnon
  • Publication Date: 11-2013
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: There is a long-standing debate among economists and policymakers on the benefits of flexible versus fixed exchange rates (Klein and Shambaugh 2010). In principle, flexible exchange rates allow a country's central bank to focus on stabilizing economic growth and inflation, which are the ultimate goals of monetary policy. However, some argue that in practice central banks often do not use their powers wisely and it may be better to restrict their freedom by requiring them to peg their currency to that of an important trading partner. Others note that flexible exchange rates are far more volatile than fundamental factors can explain (Flood and Rose 1995), raising the possibility that they may introduce wasteful cross-sectoral fluctuations in economic activity. One common viewpoint is that flexible exchange rates may be fine for large countries but that the smallest countries are better off with fixed exchange rates (Åslund 2010).
  • Topic: Economics, Foreign Exchange, International Trade and Finance, Markets, Financial Crisis
  • Political Geography: United States, Japan, China, United Kingdom
  • Author: Arvind Subramanian, Aaditya Mattoo, Prachi Mishra
  • Publication Date: 03-2012
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This paper estimates the impact of China's exchange rate changes on exports of competitor countries in third markets, known as the "spillover effect." Recent theory is used to develop an identification strategy in which competition between China and its developing country competitors in specific products and destinations plays a key role. The variation is used—afforded by disaggregated trade data—across exporters, importers, product, and time to estimate this spillover effect. The results show robust evidence of a statistically and quantitatively significant spillover effect. Estimates suggest that, on average, a 10 percent appreciation of China's real exchange rate boosts a developing country's exports of a typical 4-digit Harmonized System (HS) product category to third markets by about 1.5 to 2 percent. The magnitude of the spillover effect varies systematically with product characteristics as implied by theory.
  • Topic: Development, Economics, Markets
  • Political Geography: China
  • Author: Theodore H. Moran, Julia Muir, Barbara Kotschwar
  • Publication Date: 02-2012
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: China's need for vast amounts of minerals to sustain its high economic growth rate has led Chinese investors to acquire stakes in natural resource companies, extend loans to mining and petroleum investors, and write long-term procurement contracts for oil and minerals in Africa, Latin America, Australia, Canada, and other resource-rich regions. These efforts to procure raw materials might be exacerbating the problems of strong demand; "locking up" natural resource supplies, gaining preferential access to available output, and extending control over the world's extractive industries. But Chinese investment need not have a zero-sum effect if Chinese procurement arrangements expand, diversify, and make more competitive the global supplier system. Previous Peterson Institute research (see Moran 2010) and new research undertaken in this paper, show that the majority of Chinese investments and procurement arrangements serve to help diversify and make more competitive the portion of the world natural resource base located in Latin America. For a more comprehensive analysis, the authors conduct a structured comparison of four Peruvian mines with foreign ownership: two Organization for Economic Cooperation and Development-based, and two Chinese. They examine what conditions or policy measures are most effective in inducing Chinese investors to adopt international industry standards and best-practices, and which are not. They distill from this case study some lessons for other countries in Latin America, Africa, and elsewhere that intend to use Chinese investment to develop their extractive sectors: first, that financial markets bring accountability; second, that the host country regulatory environment makes a significant difference; and third, that foreign investment is a catalyst for change.
  • Topic: Economics, International Trade and Finance, Natural Resources
  • Political Geography: China, Canada, Latin America, Australia
  • Author: Arvind Subramanian, Martin Kessler
  • Publication Date: 10-2012
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: A country's rise to economic dominance tends to be accompanied by its currency becoming a reference point, with other currencies tracking it implicitly or explicitly. For a sample comprising emerging market economies, we show that in the last two years, the renminbi has increasingly become a reference currency which we define as one which exhibits a high degree of co-movement (CMC) with other currencies. In East Asia, there is already a renminbi bloc, because the renminbi has become the dominant reference currency, eclipsing the dollar, which is a historic development. In this region, 7 currencies out of 10 co-move more closely with the renminbi than with the dollar, with the average value of the CMC relative to the renminbi being 40 percent greater than that for the dollar. We find that co-movements with a reference currency, especially for the renminbi, are associated with trade integration. We draw some lessons for the prospects for the renminbi bloc to move beyond Asia based on a comparison of the renminbi's situation today and that of the Japanese yen in the early 1990s. If trade were the sole driver, a more global renminbi bloc could emerge by the mid-2030s but complementary reforms of the financial and external sector could considerably expedite the process.
  • Topic: Development, Economics, Emerging Markets, Foreign Exchange, Monetary Policy
  • Political Geography: China, Asia
  • Author: Olivier Jeanne
  • Publication Date: 09-2012
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This paper presents a simple model of how a small open economy can undervalue its real exchange rate using its capital account policies. The paper presents several properties of such policies, and proposes a rule of thumb to assess their welfare cost. The model is applied to an analysis of Chinese capital account policies.
  • Topic: Development, Economics, Emerging Markets, Monetary Policy
  • Political Geography: China
  • Author: Stephan Haggard, Marcus Noland
  • Publication Date: 05-2012
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: A central hope of engagement with North Korea is that increased cross-border exchange will encourage the strengthening of institutions, and eventually, a moderation of the country's foreign policy. An unprecedented survey of Chinese enterprises operating in North Korea reveals that trade is largely dominated by state entities on the North Korean side, although the authors cannot rule out de facto privatization of exchange. Little trust is evident beyond the relationships among Chinese and North Korean state-owned enterprises. Formal networks and dispute settlement mechanisms are weak and do not appear to have consequences for relational contracting. Rather, firms rely on personal ties for identifying counterparties and resolving disputes. The weakness of formal institutions implies that the growth in exchange does not conform with the expectations of the engagement model and may prove self-limiting. The results also cast doubt that integration between China and North Korea, at least as it is currently proceeding, will foster reform and opening.
  • Topic: Foreign Policy, Economics, International Trade and Finance, Bilateral Relations
  • Political Geography: China, Israel, North Korea
  • Author: Gary Clyde Hufbauer, Sean Lowry
  • Publication Date: 04-2012
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: In his 2012 State of the Union address, President Obama claimed that "over a thousand Americans are working today because we stopped a surge in Chinese tires." The tire tariff case, decided by the president in September 2009, exemplifies his efforts to get China to "play by the rules" and serves as a plank in his larger platform of insourcing jobs to America.
  • Topic: Economics, Industrial Policy, International Trade and Finance, Governance
  • Political Geography: United States, China, America
  • Author: William R. Cline
  • Publication Date: 04-2012
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: For several years China has run persistent current account surpluses that have been widely seen as the most serious single source of global imbalances on the surplus side, and mirrored by persistent systemically large US current account deficits on the other side. In recent years, however, both imbalances have shown moderation (figure 1). China's surpluses have posed questions of international policy rules, because they have reflected in part an unwillingness to allow the exchange rate to appreciate sufficiently to act as an effective equilibrating mechanism. Exchange rate intervention resulted in a massive buildup of international reserves, which rose from $615 billion at the end of 2004 to $3.2 trillion at the end of 2011 (IMF 2012a).
  • Topic: Economics, Emerging Markets, Foreign Exchange, International Trade and Finance
  • Political Geography: United States, China, Israel
  • Author: Nicholas R. Lardy, Patrick Douglass
  • Publication Date: 02-2011
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Despite an erosion of consensus on its benefits, capital account convertibility remains a long-term goal of China. This paper identifies three major preconditions for convertibility in China: a strong domestic banking system, relatively developed domestic financial markets, and an equilibrium exchange rate. The authors examine each of these in turn and find that, in significant respects, China does not yet meet any of the conditions necessary for convertibility. They then evaluate China's progress to date on capital account liberalization, including recent efforts to promote renminbi internationalization and greater use of the renminbi in trade settlement. The paper concludes with an overview of remaining obstacles to convertibility and policy recommendations.
  • Topic: Development, Economics, Monetary Policy
  • Political Geography: China
  • Author: Theodore H. Moran
  • Publication Date: 04-2011
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: What is the relationship between foreign manufacturing multinational corporations (MNCs) and the expansion of indigenous technological and managerial technological capabilities among Chinese firms? China has been remarkably successful in designing industrial policies, joint venture requirements, and technology transfer pressures to use FDI to create indigenous national champions in a handful of prominent sectors: high speed rail transport, information technology, auto assembly, and an emerging civil aviation sector. But what is striking in the aggregate data is how relatively thin the layer of horizontal and vertical spillovers from foreign manufacturing multinationals to indigenous Chinese firms has proven to be. Despite the large size of manufacturing FDI inflows, the impact of multinational corporate investment in China has been largely confined to building plants that incorporate capital, technology, and managerial expertise controlled by the foreigner. As the skill-intensity of exports increases, the percentage of the value of the final product that derives from imported components rises sharply. China has remained a low value-added assembler of more sophisticated inputs imported from abroad—a “workbench” economy. Where do the gains from FDI in China end up? While manufacturing MNCs may build plants in China, the largest impact from deployment of worldwide earnings is to bolster production, employment, R, and local purchases in their home markets. For the United States the most recent data show that US-headquartered MNCs have 70 percent of their operations, make 89 percent of their purchases, spend 87 percent of their R dollars, and locate more than half of their workforce within the US economy—this is where most of the earnings from FDI in China are delivered.
  • Topic: Economics, Industrial Policy, International Trade and Finance, Science and Technology
  • Political Geography: United States, China, Israel
  • Author: Arvind Subramanian
  • Publication Date: 09-2011
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Against the backdrop of the recent financial crisis and the ongoing rapid changes in the world economy, the fate of the dollar as the premier international reserve currency is under scrutiny. This paper attempts to answer whether the Chinese renminbi will eclipse the dollar, what will be the timing of, and the prerequisites for this transition, and which of the two countries controls the outcome. The key finding, based on analyzing the last 110 years, is that the size of an economy—measured not just in terms of GDP but also trade and the strength of the external financial position—is the key fundamental correlate of reserve currency status. Further, the conventional view that sterling persisted well beyond the strength of the UK economy is overstated. Although the United States overtook the United Kingdom in terms of GDP in the 1870s, it became dominant in a broader sense encompassing trade and finance only at the end of World War I. And since the dollar overtook sterling in the mid-1920s, the lag between currency dominance and economic dominance was about 10 years rather than the 60-plus years traditionally believed. Applying these findings to the current context suggests that the renminbi could become the premier reserve currency by the end of this decade, or early next decade. But China needs to fulfill a number of conditions—making the reniminbi convertible and opening up its financial system to create deep and liquid markets—to realize renminbi preeminence. China seems to be moving steadily in that direction, and renminbi convertibility will proceed apace not least because it offers China's policymakers a political exit out of its mercantilist growth strategy. The United States cannot in any serious way prevent China from moving in that direction.
  • Topic: Economics, Markets, Monetary Policy
  • Political Geography: United States, China
  • Author: Arvind Subramanian, Aaditya Mattoo
  • Publication Date: 12-2011
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Until recently, the World Trade Organization (WTO) has been an effective framework for cooperation because it has continually adapted to changing economic realities. The current Doha Agenda is an aberration because it does not reflect one of the biggest shifts in the international economic and trading system: the rise of China. Even though China will have a stake in maintaining trade openness, an initiative that builds on but redefines the Doha Agenda would anchor China more fully in the multilateral trading system. Such an initiative would have two pillars. First, a new negotiating agenda that would include the major issues of interest to China and its trading partners, and thus unleash the powerful reciprocal liberalization mechanism that has driven the WTO process to previous successes. Second, new restraints on bilateralism and regionalism that would help preserve incentives for maintaining the current broad non-discriminatory trading order.
  • Topic: Economics, Globalization, International Trade and Finance, Markets
  • Political Geography: China, Israel
  • Author: William R. Cline, John Williamson
  • Publication Date: 05-2011
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: This policy brief updates our estimates of fundamental equilibrium exchange rates (FEERs) to the latest available data, which for exchange rates are the average rates of April 2011, and for the IMF's balance of payments forecasts, those published in the April 2011 issue of World Economic Outlook (WEO; see IMF 2011a). It is the central study in what has now become a regular annual cycle, in which we draw out what we believe to be the implications of the IMF's forecasts for the pattern that exchange rates need to take if the world is to approach a reasonably satisfactory medium-run position. This past year we also published an interim policy brief (Cline and Williamson 2010b) in which we updated our calculations to the average exchange rates of October 2010, as well as commented on Brazilian Finance Minister Guido Mantega's description of international monetary events as constituting "currency wars." As in the previous year, however, the November 2010 policy brief updated our estimates only for intervening changes in market exchange rates. We did not make use of the IMF's revised autumn WEO forecasts to update our estimates of FEERs; on the contrary, we assumed the FEERs estimated in May 2010 were correct. In contrast, this policy brief presents totally new estimates of FEERs.
  • Topic: Economics, Monetary Policy
  • Political Geography: United States, China
  • Author: Arvind Subramanian, Aaditya Mattoo, Francis Ng
  • Publication Date: 05-2011
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: The puzzle about the Doha Round of multilateral trade negotiations in the World Trade Organization (WTO) is not why it is on life support now but how it has survived as a viable multilateral initiative for so long. From the very beginning, it was clear that the Round suffered from a lack of private-sector interest, the engine that had driven previous rounds of successful trade negotiations. At most, Doha promised to deliver some security of access for unilateral liberalization previously undertaken by countries and some modest incremental market opening (Martin and Mattoo 2009; Hufbauer, Schott, and Wong 2010). That the Round had much to be modest about was reflected in the failure of even antiglobalization protesters to show up for the more recent meetings of the Doha Round.
  • Topic: Economics, Globalization, International Trade and Finance, Markets
  • Political Geography: China
  • Author: John Williamson
  • Publication Date: 01-2011
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: The world has witnessed two distinct attempts to build a multilateral mechanism to discipline surplus countries that declined to adjust their surpluses, and several proposals are currently on the table to do the same. On the two previous occasions the major surplus country of the day defeated attempts to create such a mechanism, and today China (not to mention Japan or Germany) exhibits no enthusiasm for the idea. Despite the importance of the issue, there has been remarkably little discussion of these proposals.
  • Topic: Economics, International Trade and Finance, International Monetary Fund, Monetary Policy
  • Political Geography: Japan, China, Germany
  • Author: Edwin M. Truman
  • Publication Date: 09-2010
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This paper addresses the agenda for the Group of Twenty (G-20) leaders' meeting in Seoul, Korea in November 2010. This is an opportunity and challenge for Asian leaders in particular. Their test will be, first, to demonstrate that they can responsibly advance economic recovery. They must also deliver on institutional reform, in particular of the International Monetary Fund (IMF). I advocate a substantial expansion of the IMF's role as lender of last resort that is integrated with the surveillance role of the IMF in the form of comprehensive prequalification for IMF assistance and policy advice and a substantial increase in the IMF's financial resources. I also propose an approach to meaningful reform of the distribution of IMF quotas along with limiting European seats on the IMF executive board.
  • Topic: Economics, Emerging Markets, Global Recession, Financial Crisis, Governance
  • Political Geography: China, Israel, Asia, Korea
  • Author: Gary Clyde Hufbauer, Jared C. Woollacott
  • Publication Date: 12-2010
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This study covers the history of Sino-US trade relations with a particular focus on the past decade, during which time each has been a member of the World Trade Organization (WTO). Providing a brief history of 19th and 20th century economic relations, this paper examines in detail the trade disputes that have arisen between China and the United States over the past decade, giving dollar estimates for the trade flows at issue. Each country has partaken in their share of protectionist measures, however, US measures have been characteristically defensive, protecting declining industries, while Chinese measures have been characteristically offensive, promoting nascent industries. We also cover administrative and legislation actions within each country that have yet to be the subject of formal complaint at the WTO. This includes an original and comprehensive quantitative summary of US Section 337 intellectual property rights cases. While we view the frictions in Sino-US trade a logical consequence of the rapid increase in flows between the two countries, we caution that each country work within the WTO framework and respect any adverse decisions it delivers so that a protracted protectionist conflict does not emerge. We see the current currency battle as one potential catalyst for such conflict if US and Chinese policymakers fail to manage it judiciously.
  • Topic: Economics, International Trade and Finance, Markets, Bilateral Relations
  • Political Geography: United States, China
  • Author: Nicholas R. Lardy
  • Publication Date: 03-2010
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: China's policy response to the global financial and economic crisis was early, large, and well-designed. Although Chinese financial institutions had little exposure to the toxic financial assets that brought down many large Western investment banks and other financial firms, China's leadership recognized that its dependence on exports meant that it was acutely vulnerable to a global recession. Thus they did not subscribe to the view sometimes described as “decoupling,” the idea that Asian countries could passively weather the financial storm that originated in the United States and other advanced industrial economies. They understood that absent a vigorous policy response China inevitably would suffer from the backwash of a sharp economic slowdown in its largest export markets—the United States and Europe.
  • Topic: Economics, Financial Crisis
  • Political Geography: United States, China, Europe, Asia
  • Author: Arvind Subramanian
  • Publication Date: 04-2010
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: Is there reason to add to the proliferating set of estimates on the extent of renminbi undervaluation (see among others, Bergsten 2010; Cline and Williamson 2008 and 2010; Goldstein and Lardy 2008 and 2009; Frankel 2008; Reisen 2009; and Lee et al. 2008)? Yes, not least because these new estimates: (1) suggest that purchasing power parity (PPP)-based approaches to measuring renminbi undervaluation suggest that China's currency is undervalued by about 30 percent against the dollar and not the 12 percent recently reported (Bajaj 2010); and (2) are closer to and consistent with alternative approaches to estimating renminbi undervaluation.
  • Topic: Economics, Foreign Exchange, International Political Economy, Monetary Policy
  • Political Geography: China
  • Author: Daniel H. Rosen
  • Publication Date: 06-2010
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: On Sunday, June 13, 2010 representatives from China and Taiwan held a third round of talks in Beijing on an Economic Cooperation Framework Agreement (ECFA) that would liberalize important aspects of cross-Strait economic relations. Details of what was agreed and what remains under negotiation are still trickling out, and in any case the nature of this framework is that various elements will be agreed upon on an ongoing basis rather than at once. But it is clear from available details that ECFA will be an ambitious accord that fundamentally changes the game between Taiwan and China and hence affects the regional economy and even the transpacific tempo for the United States.
  • Topic: Economics, International Cooperation, International Trade and Finance, Treaties and Agreements, Bilateral Relations
  • Political Geography: United States, China, Taiwan
  • Author: William R. Cline
  • Publication Date: 08-2010
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: On June 21, 2010, in the run-up to the G-20 meeting in Toronto, China announced that it would shift to a more flexible exchange rate policy. From mid-June to July 30 the yuan rose 0.8 percent against the dollar. In contrast, the currency had remained fixed (at about 6.83 yuan to the dollar) from September 2008 to early June 2010. Pressure not only from the United States and the European Union but also from Russia, Brazil, and India as well as the IMF seems likely to have played a role in China's decision, although concerns about domestic inflation may also have been a factor.
  • Topic: Economics, Monetary Policy
  • Political Geography: United States, China
  • Author: Arvind Subramanian, Aaditya Mattoo
  • Publication Date: 08-2009
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Th is paper documents an unusual and possibly significant phenomenon: the export of skills embodied in goods, services, or capital from poorer to richer countries. We fi rst present a set of stylized facts. Using a measure that combines the sophistication of a country's exports with the average income level of destination countries, we show that the performance of a number of developing countries, notably China, Mexico, and South Africa, matches that of much more advanced countries, such as Japan, Spain, and the United States. Creating a new combined dataset on foreign direct investment (FDI) (covering greenfi eld investments as well as mergers and acquisitions) we show that fl ows of FDI to Organization for Economic Cooperation and Development (OECD) countries from developing countries like Brazil, India, Malaysia, and South Africa as a share of their GDP are as large as fl ows from countries like Japan, Korea, and the United States. Th en, taking the work of Hausmann et al. (2007) as a point of departure, we suggest that it is not just the composition of exports but their destination that matters. In both cross-sectional and panel regressions, with a range of controls, we fi nd that a measure of uphill fl ows of sophisticated goods is signifi cantly associated with better growth performance. Th ese results suggest the need for a deeper analysis of whether development benefi ts might derive not from deifying comparative advantage but from defying it.
  • Topic: Economics, Globalization, Foreign Direct Investment
  • Political Geography: China, South Africa, Mexico
  • Author: Stephan Haggard, Marcus Noland
  • Publication Date: 07-2009
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: As a small country dependent on foreign trade and investment, North Korea should be highly vulnerable to external economic pressure. In June 2009, following North Korea's second nuclear test, the UN Security Council passed Resolution 1874, broadening existing economic sanctions and tightening their enforcement. However, an unintended consequence of the nuclear crisis has been to push North Korea into closer economic relations with China and other trading partners that show little interest in cooperating with international efforts to pressure North Korea, let alone in supporting sanctions. North Korea appears to have rearranged its external economic relations to reduce any impact that traditional sanctions could have.
  • Topic: Economics, International Trade and Finance, Sanctions
  • Political Geography: China, North Korea, United Nations
  • Author: Arvind Subramanian, Aaditya Mattoo, Dominique van der Mensbrugghe, Jianwu He
  • Publication Date: 12-2009
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: There is growing clamor in industrial countries for additional border taxes on imports from countries with lower carbon prices. While this paper confirms the findings of other research that unilateral emissions cuts by industrial countries will have minimal carbon leakage effects, output and exports of energy-intensive manufactures are projected to decline, potentially creating pressure for trade action. A key factor affecting the impact of any border taxes is whether they are based on the carbon content of imports or the carbon content of domestic production. The paper's quantitative estimates suggest that the former action when applied to all merchandise imports would address competitiveness and environmental concerns in high income countries but with serious consequences for trading partners. Border tax adjustment based on the carbon content in domestic production would broadly address the competitiveness concerns of producers in high income countries and less seriously damage developing country trade.
  • Topic: Climate Change, Economics, Energy Policy, Environment, International Trade and Finance
  • Political Geography: China
  • Author: Daniel H. Rosen, Thilo Hanemann
  • Publication Date: 06-2009
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: In 1967 Jean-Jacques Servan-Schreiber published Le defi americain, a call to beware of American multinationals buying up the world. In the 1980s and 1990s it was Japan's turn, spawning books like Clyde Prestowitz's 1993 Trading Places: How We Are Giving Our Future to Japan. Today it is China's outbound foreign direct investment (OFDI) that elicits the most anxiety China's OFDI has reached commercially and geoeconomically significant levels and begun to challenge international investment norms and affect international relations.
  • Topic: International Relations, Economics, International Trade and Finance, Foreign Direct Investment
  • Political Geography: China, America, Asia
  • Author: John Williamson
  • Publication Date: 06-2009
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: A once-familiar but long-neglected acronym has reappeared in newspapers in recent weeks. We have read that the G-20 meeting in London endorsed a proposal that the International Monetary Fund (IMF) should create $250 billion in Special Drawing Rights (SDRs). We have been told that one problem with this proposal is that most of the SDR allocation would accrue to countries that are unlikely to use them, and some readers may have seen proposed ways around this difficulty. We have read that the governor of the People's Bank of China, Zhou Xiaochuan, has proposed that the SDR should gradually displace the dollar at the center of the international monetary system and that surplus countries should be able to convert their dollar holdings into SDR-denominated assets. No one can doubt that the SDR is back.
  • Topic: Economics, International Cooperation, International Political Economy, International Trade and Finance, Monetary Policy
  • Political Geography: United States, China