Joseph A. Massey and Lee M. Sands: The Yen’s Lesson for the Yuan

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[Joseph A. Massey and Lee M. Sands, partners in an investment advisory and consulting firm, were the chief trade negotiators with China at the Office of the United States Trade Representative from 1985 to 1992 and 1992 to 1997, respectively.]

AMONG the many points of tension between the United States and China, perhaps the single greatest one concerns exchange rates. For more than a decade, Beijing has kept the value of the renminbi, also known as the yuan, more or less constant to the dollar, a strategy that critics say increases the price of American exports to China and fuels the rapidly growing trade deficit with Beijing....

Lost in the noise, however, is the question of whether de-linkage would actually have any effect on the trade deficit. On this, the United States’ 40-year history of pressuring Japan to let the yen appreciate against the dollar is instructive. It indicates that de-linking the yuan would make barely a dent in America’s trade deficit. Luckily, this history also points to a different, more effective way for the United States to benefit from China’s economic growth.

The Japanese story began in August 1971 when, with the American economy under strong inflationary pressure, President Richard Nixon took the dollar off the gold standard, letting its value fall....

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