(Editor’s note: The following is the Testimony of Federal Reserve Bank, Chairman Alan Greenspan on China trade before the US Senate Committee on Finance, June 23, 2005)
Mr. Chairman and members of the Committee, I am pleased to be here today to offer my views on China’s trade and exchange rate regime. I would emphasize that the views I will express are my own and do not necessarily represent those of the Federal Reserve Board.
Some observers mistakenly believe that a marked increase in the exchange value of the Chinese renminbi (RMB) relative to the U.S. dollar would significantly increase manufacturing activity and jobs in the United States. I am aware of no credible evidence that supports such a conclusion.
The enhanced integration of China into the world trading system is having a notable effect on Asia’s trade with the rest of the world and on trade within Asia. After having risen rapidly through the 1990s, US imports from Asia excluding China have flattened since 2000. This has occurred as production within Asia has evolved, with the final stages of assembly and exporting to the United States and elsewhere becoming increasingly concentrated in China. As a consequence, because exports by country are recorded on a gross basis rather than as value added, the widening of the United States’ bilateral trade deficit with China, measured gross, has largely been in lieu of wider deficits with other Asian economies, including Japan. Measured by value added, our bilateral deficits with China would have been far less, and our bilateral deficits with other Asian exporters would have been far more.
Accordingly, an increase in the exchange rate of the RMB, relative to the dollar, would likely redirect trade within Asia, reversing to some extent the patterns that have emerged during the past half decade. However, a revaluation of the RMB would have limited consequences for overall US imports as well as for US exports that compete with Chinese products in third markets. Such a revaluation would affect Chinese value added but not the dollar cost of intermediate goods imported into China from the rest of Asia, which represents a significant share of the gross value of Chinese exports to the United States and elsewhere. (To the extent that exporters to China revalued as well, of course, the impact on overall Asian exports would be somewhat greater.)
The broad tariff on Chinese goods that has recently been proposed, should it be implemented, would significantly lower US imports from China but would comparably raise US imports from other low-cost sources of supply. At only slightly higher prices than prevail at present, US imports of textiles, light manufactures, assembled computers, toys, and similar products would in part shift from China as the final assembler to other emerging-market economies in Asia and, perhaps, in Latin America as well. Few, if any, American jobs would be protected.
More generally, any significant elevation of tariffs that substantially reduces our overall imports, by keeping out competitively priced goods, would materially lower our standard of living. A return to protectionism would threaten the continuation of much of the extraordinary growth in living standards worldwide, but especially in the United States, that is due importantly to the post-World War II opening of global markets. Such an initiative would send the adverse message to our trading partners that the United States, while accepting the benefits of broadened world trade, is not willing to absorb the structural adjustments that are often necessary.
To maintain a rising standard of living, a dynamic economy such as ours requires a continual shifting of resources toward the most up-to-date technologies, financed not only by savings but also importantly by the depreciation of increasingly obsolescent facilities.
This highly dynamic process is mirrored in our labor markets, where jobs are constantly being created and destroyed at a rapid pace. New hires in the United States currently average more than a million p