By Jagdish Bhagwati | 05 June 2010
The underlying argument is based on a syllogism. The first argument is that an undervalued renminbi is the root cause of the Chinese current account surpluses and the United States current account deficits. The second argument is that the export expansion so achieved by China robs countries such as Brazil and India of their export markets.
But neither argument is acceptable. Consider first the error in the second argument. Just because China fixes its exchange rate against the U.S. dollar does not mean that India cannot choose the value of its currency against the dollar or other currencies including the renminbi at the level it sees appropriate for itself. What happens to India’s exports and imports depends on what it does to its own exchange rate, money supply and fiscal deficits and how its savings and investment are balanced.