This working paper (pdf) on China’s contribution to global trade imbalances by Wing Thye Woo & Geng Xiao of Brookings is interesting. They are skeptical of calls to revalue the yuan.

I think this calculation is a bit heroic (i.e. not easily derived from available evidence):

Based on a partial review of the literature, my assessment is that the pressure that is preventing US wages (especially wages of unskilled labor) from rising in line of GDP growth can be roughly decomposed among the various factors as follows:

• 70-80 percent of the downward wage pressures is from labor-substituting technological innovations, and wage-weakening institutional changes;

• 5-10 percent of the downward wage pressure is from inward immigration; and

• 15-20 percent of the downward pressure is from import competition and relocation of manufacturing activities abroad.

This story, on the other hand, is plausible:

But this move would only hurt China and not “save” the world. Ceteris paribus, in the aftermath of the 40 percent yuan appreciation, foreign companies producing in China for the G7 markets would move their operations to other Asian economies (e.g. Vietnam and Thailand) and export from there, and G7 importers would start importing the same goods from other Asian countries instead. In the absence of a collective appreciation of all Asian currencies, the yuan appreciation will only re-configure the geographical distribution of the global imbalances and not eliminate them.

Of course, is ceteris paribus appropriate or would the general equilbrium story differ?

[HT: All Roads Lead to China]