The Effect of a Generalized Appreciation of East Asian Currencies on Exports from China(节选)Gordon RSmith George Mason University, 2002Master of Business AdministrationOver the past several years, China has seen a significant rise in its trade andcurrent account surpluses. The International Monetary Fund (IMF) estimates that by theend of 2007,Chinascurrentaccount surplus represented 11.1 percent of the countrysgross domestic product (GDP). At $361 billion, it was the largest surplus of any countryin the world, more than $100 billion greater than the country with the second largestsurplus, Japan.With such a large overall surplus, it would seem that China would have a tradesurplus with just about every other country in the world. Interestingly, this is not the case.There appears to be a fairly clear delineation, as it regards Chinas trade accountsbetween those countries in East Asia and the rest of the worldOf Chinas seven largest trading partners in 2007 (countries/regions thatrepresented more than $100 billion in total trade value each), five were in East Asia.They were Japan, ASEAN (Association of Southeast Asian Nations), Hong Kong, SouthKorea, and Taiwan. Excluding Hong Kong, the four remaining countries/regions, as agroup, recorded a trade surplus with China of more than $180 billion. That is, in terms of its trade accounts, China ran a substantial trade deficit with its major trading partners in East Asia. On the other side of the equation, China had a substantial trade surplus with its two largest trade partners, the European Union (EU) and the United States (U. S.). With a total value in trade of more than $600 billion (imports plus exports), the EU and U.S. Had a combined deficit with China of more than $270 billion. What this implies is that the trade deficits which China carries with its trading partners in East Asia are more than compensated by the trade surpluses that China carries with the rest of the world. It is the size of these trade surpluses that has become the focus of attention of a number of countries, especially the United States. China has received a great deal of scrutiny in the U.S. because of the size of its bilateral trade surplus. Several politicians and some economists have called for anappreciation of the RMB as a possible means of affecting Chinas trade surplus with the United States. This has come largely on the belief that China has intervened in the foreign exchange market in order to keep its currency artificially low with respect to the U.S.dollar. An appreciation of the RMB is seen as a way to increase the cost of, and thus reduce, Chinas exports. However, an appreciation of the RMB alone may not deliver the desired impact on all exports originating out of China. This is due to the intricate production and trade networks which exist in East Asia. Referred to as vertical intra-industry trade, manufacturing firms in East Asia have taken advantage of differences in a countrys factor endowments (e.g. access to raw materials, low input costs, labor supply) to exploit efficiencies in cost and production. By utilizing foreign direct investment, firms located primarily in developed East Asia (e.g. Japan) have established production platforms throughout the rest of the region. In many cases, extensive trade relationships have been established between emerging Asia (e.g. South Korea, Taiwan), providing intermediate parts and components, and developing Asia (e.g. China), providing assembly and export operations. Therefore, the total value of final goods for export from East Asia is often a combination of value added from several different countries in the region. Though China maintains a sizeable percentage of trade in goods producedprimarily from its own domestic inputs, the majority of its exports have been produced primarily from inputs originating from other countries in East Asia. This accounts for the large trade deficits China has with countries like Taiwan, South Korea, and Japan. A significant percentage of these goods are exported to the EU and the U.S., which helps to explain the large trade surpluses China maintains with these countries/regions. Therefore, given the value added to Chinas exports from other countries in East Asia, an appreciation of the alone may not have the same impact as a generalized appreciation of currencies. This generalized appreciation would include not only the RMB ,but also the currencies of those countries which are Chinas primary suppliers of parts and components. This would go a lot further in affecting those goods produced primarily from Chinese inputs, as well as those goods produced primarily from inputs originating from other countries in East Asia. The U.S. Trade Deficit and China These issues highlight just some of the potential outcomes which could resultfrom a consistent and growing U.S. trade and current account deficit. However, t