The Export Boom was Due to Dollar's Depreciation

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Boom with No Bust
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There wasn't a fundamental liberalization that coincided with WTO entry.

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<p>There was a consolidation of China's exchange rate in the early 90s, a unification, a sort of individual exchange rate which led to a significant depreciation of the RMB formally then and that was followed by a period of sustained export growth. But, I think I would differentiate the 90s from the period after 2002 for a couple of reasons. One, the pace of growth in the 90s was much slower on the export side -- I haven't looked at the domestic side, but it was slower -- and it was much more cyclical. There were ups and downs throughout the 1990s. There was an early boom and China slammed on the breaks when it looked like it was getting out of control. And the '97-'98 crisis led to another cycle in China's exports. And there was a 3rd cycle in 2000-2001 with the tech bust. So, over this period, China's exports and imports are growing, but at a slower pace and it is not a sort of a sustained increase, it's a very cyclical booms and bust. And I would differentiate that from the period from 2001, 2002 to now, where it is, in effect, both domestically and externally, one -- at least until now, now we're entering the bust phase -- sustained boom in exports. There was no real cyclicality, just continued upward momentum, tremendous acceleration in the pace of growth on the export side. Some people point to the WTO entry. I'm less convinced because the WTO entry kind of codified what was already happening. If you look at the US side, the US had already allowed most favored nation status to China -- that's subject to annual renewal -- but there wasn't a fundamental liberalization that coincided with WTO entry. I would tend to think it's actually something much simpler, well not simpler. I think it's the change in trajectory of China's currency, which wasn't tied to a change in China's currency so much as change in the trajectory of the dollar. So that, after the unification of China's exchange rate regime in the early 90s, the dollar started on fairly strong uptrend where the dollar was appreciating against most emerging currencies, but also the euro and the yen, from sort of '95, when it was sort of a dollar low to 2001-2002. And then, in 2002, the dollar starts on a sustained downtrend and China's real exchange rate goes from a trend appreciation to a pretty significant depreciation. Because those two events coincide, it's very hard to disentangle which is the more important factor. But, I would tend to think it's the change in the trajectory of the exchange rate.</p>
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Brad Setser explains how the dollar's depreciation, starting in 2001-2002, and not its accession to the WTO, led to China's continuous export boom.