83% of the U.S. non-oil trade deficit is with China.
In the blog piece, The problem with relying on the dollar to produce a real appreciation in China …, we have a fairly in depth analysis on the Renminbi currency peg to the dollar and the massive trade deficit.
there is now plenty of evidence that a weak RMB does have an impact on the pattern of global trade. A big impact.
The boom in China’s exports that characterized this decade came after the dollar’s 2002-2004 depreciation produced a significant real depreciation of China’s RMB — a depreciation that came just as a host of internal reforms pushed China’s own productivity up. The net result: a huge export boom.
Econbrowser has an exceptional analysis piece, Three Pictures: China's Exchange Rate and Trade Balances. While believing the China trade deficit has more to do with price elasticities that are small, he too is noticing the exchange rate with respect to the total China trade imbalance has an astounding correlation.
The Chinese CA surplus was forecasted for 10.3 ppts of GDP in 2009, and 9.3 in 2010. The most recent Public Information Notice for China (released 5 days ago) forecasts 9.5 for 2009, so clearly events are fast overtaking forecasts.
Here, of course, I'm talking about short term trends, and these are dominated by the financial crisis and recession . My Eswar Prasad writes on prospects and policy implications for China while Bertaut, Kamin and Thomas write about what happens after the recession to the US external accounts, based upon pre-crisis trade elasticites. Whether those estimated trade elasticities will be the right ones in the longer term is up for debate
The above graph shows the exchange rate of the dollar vs. the Chinese real trade weighted CNY.
Chinn also reviews the Peterson Institute for International Economics' new book, The Future of China's Exchange Rate Policy and concludes:
They argue -- from a back-of-the-envelope calculation -- that a 45% appreciation would have eliminated the 2007 trade surplus of 11 percentage points of GDP.
If this back of the envelope calculation is valid, as I read it, implies one could solve the trade deficit with China by just addressing currency manipulation.
Policy recommendations from PIIE goes into great statistical detail, but they clearly illustrate China is manipulating it's currency to keep them at a competitive advantage in manufacturing. PIIE also implies enabling the China currency to float is tricky. One key element to this is precisely what the Obama administration discussed with China, for China to grow it's own consumer economy to replace the lost export dominance that would occur if the Yuan was allowed to appreciate.
So, it appears those pushing for China to stop it's currency manipulation, claiming such legislation would help greatly in reducing the beyond belief trade imbalance with China, are getting analysis from top economists backing up their claims.