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Abstract
Trade imbalances have often led to accusations of ‘currency manipulation’ and efforts to remedy the purported effects of exchange rate misalignment. This paper investigates the impact of US pressure on China to revalue the RMB. Using vector autoregression (VAR) to analyze an original dataset of US statements and actions between 2005 and 2012, we examine the over-time dynamics between US pressure and the nominal RMB/USD exchange rate. A case study of mounting US pressure in advance of the 2010 midterm election illustrates China’s responsiveness in timing adjustments in the RMB to defuse the risk of an international confrontation. Our findings indicate that external political pressures can influence national exchange rate policies under certain conditions.
Acknowledgements
The authors thank Lizzie Shan for invaluable research assistance, Liu and Pauwels for sharing their data, Jon Pevehouse, Mark Copelovitch, David Steinberg, Lawrence Broz, Eswar Prasad, Ka Zeng, Jonathan Kirshner, three anonymous reviewers, and audiences at Yale, Oxford, UCSD, Princeton, 2013 International Political Economy Society, 2015 American Political Science Association, and 2016 Southern Political Science Association for valuable feedback on earlier drafts. All errors are our own.
Disclosure statement
No potential conflict of interests was reported by the authors.
Notes
1 Paulson, Citation2015, p. 263.
2 Morrison and Labonte, Citation2013.
3 While Bowles and Wang, Citation2016 find evidence that US pressure causes RMB appreciation, Frankel and Wei, Citation2007 and Liu and Pauwels, Citation2012 find no significant effect.
4 Ramirez, Citation2013.
5 Stop nagging China to revalue -ex-EU chief Prodi. Reuters. March 15, 2010.
6 See, for example, ‘China Yuan Ends up on PBOC Guidance. Wall Street Journal, May 21, 2013.
7 Morrison and Labonte, Citation2008, p. 38. Frankel and Wei (Citation2007, p. 578) similarly note that U.S. political pressure ‘may have been an important factor behind the 2005 announcement of a change in policy.’
8 Frieden, Citation1991; Frieden and Broz, Citation2006; Walter, Citation2008; Steinberg and Shih, Citation2012; Steinberg and Walter, Citation2012; Frieden, Citation2015; Steinberg, Citation2015.
9 Leblang, Citation1999; Steinberg and Malhotra, Citation2014; Steinberg et al., Citation2015.
10 Broz and Werfel, Citation2014; Galantucci, Citation2014.
11 As Frieden and Broz (Citation2006, p. 596) note, further research ‘needs to continue to integrate international and domestic sources of exchange rate policy.’ On the use of monetary power to achieve noneconomic goals in a foreign state, see Kirshner, Citation1997.
12 Bowles and Wang, Citation2016, p. 147.
13 Drezner, Citation2009; Bowles and Wang, Citation2016, p. 152. On ‘power as autonomy,’ see Helleiner and Kirshner, Citation2014, p. 5.
14 Bowles and Wang, Citation2016, p. 159–160.
15 As Steinberg and Shih, Citation2012 note, the government can appease opponents of revaluation with other compensatory measures.
16 See also Bowles and Wang, Citation2016, p. 159–160.
17 Frieden, Citation1991; Frankel and Rose, Citation2002; Copelovitch and Pevehouse, Citation2013.
18 Fred Bergsten, Protectionism by China Is Biggest Since World War II. New York Times, October 8, 2010.
19 Broz and Frieden, Citation2001; Broz and Werfel, Citation2014.
20 With an increasingly global supply chain, manufacturers import more than 20% on average of their intermediate inputs. See Broz and Werfel, Citation2014, p. 401.
21 Broz and Frieden, Citation2001, p. 319.
22 Broz and Werfel, Citation2014.
23 Simmons, Citation1995.
24 Momani, Citation2015, p. 301.
25 Goldstein and Lardy, Citation2008, p. 42.
26 Galantucci, Citation2014.
27 S.1586 — 108th Congress (2003–2004), accessed at https://www.congress.gov/bill/108th-congress/senate-bill/1586.
28 Including S. 1607, S. 1677, and H.R. 2942 in the 110th Congress. Hufbauer and Brunel, Citation2008, p. 220–1.
29 Only H.R. 2378 (111th) passed the House, and only S. 1619 (112th) passed the Senate.
30 Martin, Citation2000.
31 Frankel and Wei, Citation2007, p. 580; Foot and Walter, Citation2010, p. 125.
32 WRAPUP 1-US delays China currency report; lawmakers push bill. Reuters, October 14, 2011.
33 Paulson repeats call for faster China yuan rise. Reuters, October 23, 2007.
34 Bader, Citation2012, p. 117–8.
35 UPDATE 1-US Commerce aide warns against China currency bill. Reuters, January 30, 2008.
36 US's Paulson warns against China currency bill. Reuters, February 5, 2008.
37 As Rosenbluth (Citation1989) notes in the context of U.S.-Japan negotiations, “foreign diplomatic pressure is effective only when market forces have already altered domestic costs and benefits or when there is a perceived threat of retaliation” (p. 53, emphasis added).
38 See also Zeng, Citation2004. For a similar argument about the credibility of threats to use force, see Schultz, Citation2001.
39 Broz and Frieden, Citation2001, p. 333.
40 Galantucci, Citation2014.
41 UPDATE 1-US groups urge Congress not pass China currency bill. Reuters, September 14, 2010.
42 Stein and Streb, Citation2004; Blomberg et al., Citation2005; Walter, Citation2009.
43 Fowler and Ridout, Citation2010.
44 Fowler and Ridout, Citation2012.
45 Giroux, G. Bloomberg by the Numbers: 29,613. Bloomberg.com, Retreived from http://go.bloomberg.com/political-capital/2012-09-28/bloomberg-by-the-numbers-29613/, last accessed November 26, 2012.
46 Obama ad: ‘Romney tough on China. Since when?’ Washington Post, October 1, 2012, Retrieved from http://www.washingtonpost.com/blogs/post-politics/wp/2012/10/01/obama-ad-romney-tough-on-china-since-when/.
47 Mark Landler, Republicans and democrats can agree on criticizing China’s trade practices. New York Times, November 21, 2011.
48 Margalit (Citation2011) finds that voters are substantially more sensitive to trade-related job losses due to foreign competition than other factors.
49 Broz and Werfel, Citation2014, p. 413–414.
50 Goldstein and Lardy, Citation2008, p. 44.
51 Mark Landler, Republicans and democrats can agree on criticizing China’s trade practices. New York Times, November 21, 2011.
52 Copelovitch and Pevehouse, Citation2011; Broz and Frieden, Citation2001.
53 Frankel and Wei, Citation2007.
54 For similar arguments about Japanese responsiveness to U.S. pressure, see Encarnation and Mason, Citation1990; Rosenbluth, Citation1989; Schoppa, Citation1997.
55 Bowles and Wang, Citation2016, p. 164.
56 Foot and Walter, Citation2010, p. 119.
57 Hufbauer and Brunel, Citation2008, p. 227.
58 Steinberg and Shih, Citation2012.
59 Foot and Walter, Citation2010, p. 113–14.
60 Bowles and Wang, Citation2006, p. 246.
61 Ramirez, Citation2013, p. 235–6.
62 Steinberg and Shih, Citation2012, p. 19.
63 Gueorguiev et al., Citation2017.
64 UPDATE 1-US economist says China could act on yuan if US quiet. Reuters, March 23, 2010.
65 Liu and Pauwels, Citation2012, p. 1817.
66 RPT-UPDATE 1-China won't be pressured over yuan –Wen. Reuters. December 27, 2009.
67 Steinberg and Shih, Citation2012, p. 1409. Bowles and Wang, Citation2006 (p. 243) note that the growing burden on central government coffers has diminished the use of export tax rebates.
68 On average, the executive branch is more vocal than Congress (statements made on 262 compared to 107 days). However, the executive branch (M = .71, SD = .71) tends to take a more measured approach compared to the more protectionist legislative branch (M = .82, SD = .64), though this difference does not reach conventional levels of statistical significance (p = .18 for difference in means).
69 We also considered an alternative specification that includes an interaction between legislative and executive branch pressure measured separately. The substantive results remain the same.
70 Frankel and Wei, Citation2007; Ramirez, Citation2013; Bowles and Wang, Citation2016.
71 Liu and Pauwels (Citation2012) only code for statements that call for appreciation or flexibility and aggregate multiple statements into a single entry (p. 1805).
72 Yuan rises as US rate cut spurs global dollar fall. Reuters. October 30, 2008.
73 U.S. steps up call for China forex change. Reuters. April 14, 2005.
74 Paulson says yuan should appreciate in short term. Reuters. March 28, 2007.
75 G7 finance ministers to mull oil prices at weekend. Reuters. April 11, 2005.
76 INTERVIEW-China should allow further yuan rise-IMF. Reuters. April 13, 2008.
77 ANALYSIS-China quietly adjusts yuan policy, rise quickens. Reuters. September 29, 2006.
78 UPDATE 1-US Commerce aide warns against China currency bill. Reuters. January 30, 2008.
79 US lawmakers see efforts to calm Chinese currency row. Reuters. January 29, 2009.
80 The difference between 0.5 and −0.5 in cases where an official indicates that China needs more time to coordinate its reform policy is that +0.5 will include call for greater flexibility while −0.5 does not contain such message and calls for more patience for reform while praising the steps already taken by Chinese authorities.
81 INTERVIEW-IMF delays China FX report amid crisis - IMF chief. Reuters. September 30, 2008.
82 E.g., UPDATE 2-US says yuan undervalued but China not manipulator. Reuters. May 15, 2008.
83 SNAP ANALYSIS-U.S. gives currency diplomacy another chance. Reuters. October 15, 2010.
84 Freeman et al., Citation1989.
85 That is, we assign statements from the weekend to the Friday prior to the opening of Monday’s markets.
86 See, e.g., Obama to press Hu on yuan at Nov summits—Treasury, Reuters, October 25, 2011.
87 See also Liu and Pauwels, Citation2012.
88 Additional measures of domestic opposition and compensatory policies are difficult to include in a daily time series analysis due to data availability. Bowles and Wang (Citation2016, p. 158–163) generate a quarterly measure of export tax rebates from annual data, finding ambiguous results when estimating whether US pressure galvanized China to shrink exports without relying on exchange rate appreciation.
89 U.S. Federal Reserve. 2005. “Indexes of the Foreign Exchange Value of the Dollar,” p. 1 Retreived from http://www.federalreserve.gov/pubs/bulletin/2005/winter05_index.pdf.
90 Results remain substantively the same if we use the rate of change instead.
91 Models presented here use the lag length suggested by the AIC, although results remain robust to alternative lag length specifications.
92 See Freeman et al., Citation1989.
93 Because only U.S. pressure granger causes the real exchange rate, we set the causal chain as: International pressure → U.S. pressure → nominal exchange rate.
94 A decomposition of forecast error variance also suggests that the substantive amount of influence was marginal: a one standard deviation shock in U.S. pressure accounts for less than 1% of the forecast error variance in changes in the nominal exchange rate. Results available from authors upon request.
95 Chad P. Bown (2012). The Temporary Trade Barriers Database (TTBD). Retreived from http://econ.worldbank.org/ttbd/.
96 Industries file their petitions jointly with the U.S. International Trade Commission (ITC) and Department of Commerce. The ITC determines whether the U.S. industry suffered material injury. Commerce determines the margin of dumping or amount of subsidy. See Title VII of the Tariff Act of 1930 available at http://ia.ita.doc.gov/regs/title7.html.
97 Broz and Werfel, Citation2014, p. 394.
98 Liu and Pauwels (Citation2012) provided us with these additional data (available through mid-2011) on specific macroeconomic news surprises about the state of monetary conditions, economic activity, and external imbalances.
99 Frankel and Wei, Citation2007; Steinberg and Shih, Citation2012.
100 Paul Krugman, An Issue Whose Time Has Passed, New York Times, October 22, 2012.
101 Absent privileged access to internal reports and records of the decisionmaking process, these materials provide an imperfect proxy for the Chinese government’s thinking.
102 Roy, S. February 4, 2009. The Obama Administration Approach to US Relations with China, http://asiafoundation.org/in-asia/2009/02/04/the-obama-administration-approach-to-us-relations-with-china/.
103 Xie, R. Renmin Ribao. “环球瞭望：希拉里会与中国为敌吗?” February 16, 2009.
104 CIIS 2010, p. 346–7, 481.
105 Li, G., and Zan, C. “美政府否认中国操纵汇率 国会恐难善罢甘休,”21世纪经济报道. July 10, 2010.
106 Lang, X. November 17, 2010. “郎咸平：中美汇率战让中国赔了夫人又折兵,”凤凰网财经.
107 Chinese media noted that a senior delegation of Obama administration officials also increased private pressure on China in September. Lv, T. “美高官密集访华 人民币升值压力增大,”南方日报, September 9, 2010.
108 Xiong, M. 21世纪经济报道. September 10, 2010.
109 As Crédit Agricole’s Dariusz Kowalczyk stated: “it’s obvious that RMB’s appreciation in late September and early October was aimed at not giving excuse for America to label China as ‘currency manipulator.’” Cookson, R. “中国：用人民币升值抗击通胀,” FT Chinese, October 26, 2010.
110 Cui, L. “中美汇率问题再较量,” 瞭望, September 26, 2010.
111 Zhou, J. November 14, 2010. “谴责中国只是选举前的一场戏,”第一财经日报, A6.
112 Zhao, K. October 15, 2010. “美国茶党风暴可能波及中国,” 国防时报, p. 20.
113 Mo, L. 金融时报. October 13, 2010.
114 “美国推迟发布汇率报告 郭宪纲评:或为缓兵之计,”中国广播网. October 16, 2010.
115 Morrison and Labonte, Citation2011.
116 Zhou, Y. “‘货币战’没有赢家,” 人民日报, October 21, 2010.
117 Fu, S. “美国推迟公布汇率报告并非首次 总是咄咄逼人,” 证券日报, October 19, 2010.
118 “‘货币战’没有赢家,” 人民日报, October 21, 2010.
119 人民币/美元近3日升值300余点,” Sina.com, November 4, 2010.
120 Duan, C. “外交部: G20不适合讨论人民币汇率问题,” 环球时报, November 5, 2010.
121 Morrison and Labonte, Citation2011. Although an alternative explanation for RMB revaluation in 2010 could have been domestic inflation, Barry Naughton (Citation2011) notes that China adopted a “wait and see” attitude on inflation throughout 2010. Even after China’s leaders began trying to fight inflation in April 2011, they did not rely primarily on the exchange rate to do so. On arguments by the PBOC and its allies linking inflation and RMB appreciation in 2007, see Steinberg and Shih, Citation2012, p. 1418.
122 CIIS 2009, p. 338, 359, 346–7.
123 Weiss, Citation2013.
124 Frieden and Lawrence Broz, Citation2012; Goldstein and Lardy, Citation2008.
125 See, e.g., Bergsten, Citation2010. However, many scholars have argued that “the focus on China’s exchange rate policy is misplaced,” as Wang (Citation2014) notes, arguing that “simply liberalizing the exchange rate regime will not solve the dual imbalance between exports and imports, and between investment and consumption” in China. See also Goldstein and Lardy, Citation2008.
126 See also Bowles and Wang, Citation2016.
127 Zeng, Citation2004, p. 93.
128 Putnam, Citation1988; Milner, Citation1997; Martin, Citation2000.
129 Helleiner and Kirshner, Citation2014.
130 In this vein, many see China’s push to internationalize the RMB as a strategy to further domestic reform. As Alex He (Citation2015, p. 64) writes: “for China’s difficult financial reform, it seems the reversed coercing mechanism is in fact a practical option for the PBOC and its supporters.” On the role of domestic interests in conditioning the effects of China’s international economic engagement, see, e.g., Zeng, Citation2002; Liang, 2002; Zeng, Citation2004; Mertha and Pahre, Citation2005; Mertha, Citation2007; Pearson, Citation2010.
131 Krugman, Paul. An issue whose time has passed, New York Times, October 22, 2012.
132 Kessler, Martin, and Arvind Subramanian. Is the RMB still undervalued? Not according to PPP estimates. Peterson Institute for International Economics, May 1, 2014, Retreived from http://blogs.piie.com/realtime/?p=4300.
133 “IMF Staff Completes the 2015 Article IV Consultation Mission to China,” International Monetary Fund press release, May 26, 2015, Retrieved from https://www.imf.org/external/np/sec/pr/2015/pr15237.htm.
134 Currency peace, The Economist, February 21, 2015, http://www.economist.com/news/finance-and-economics/21644205-devaluing-yuan-would-do-china-more-harm-good-currency-peace; David Dollar, Currency devaluation and U.S.-China relations, Brookings Institution, September 21, 2015.
135 Donald J. Trump, Ending China’s currency manipulation, Wall Street Journal, November 9, 2015.