According to Arvind Subramanian, the biggest harm from the undervalued yuan is to developing countries:
.. an undervalued exchange rate is above all a protectionist trade policy, because it is the combination of an import tariff and an export subsidy. It follows therefore that the real victims of this policy are other emerging market and developing countries – because they compete more closely with China than the US and Europe, whose source of comparative advantage is very different from China’s.
In fact, developing countries face two distinct costs from China’s exchange rate policy.
- In the short run, with capital pouring into emerging market countries, their ability to respond to the threat of asset bubbles and overheating is undermined.
Emerging market countries such as Brazil, India and South Korea are loath to allow their currencies to appreciate – to damp overheating – when that of a major trade rival is pegged to the dollar.
- But the more serious and long-term cost is the loss in trade and growth in poorer parts of the world.
