The Myths of The Cheap Yuan; Even a doubling of the yuan's value is not going to begin to eliminate China's cost advantages.

Byline: Kenneth Rogoff (Rogoff is professor of economics and Thomas D. Cabot Professor of Public Policy, Harvard University.)

Politicians around the world seem convinced that if only China would stop tilting the scales of international currency rates, many of their economic woes would just melt away. If only Chinese goods weren't so temptingly cheap, Americans, currently engaged in the borrowing rampage of the millennium, would suddenly rediscover their Puritan roots. Mexicans, South Africans and, who knows, maybe even Europeans might see manufacturing plants again sprouting on their soil, instead of packing up and moving to China. The popular view is that by maintaining its decadelong peg to the dollar, China has prevented the natural currency appreciation that fast-growing economies normally experience.

Well, here is the news. China probably will allow its currency, the yuan, to strengthen a little bit against the dollar sometime later this year. But, although on balance this will be a good thing for everyone, it is hardly going to reshape the patterns of 21st-century economic growth.

Think about the United States, whose citizens have yet to realize that if they go on spending more than they earn, year after year, they will collectively go broke. In 2004, the United States spent about $600 billion more than it earned. Sure, if you look just at China's bilateral trade with the United States, it appears to be responsible for $80 billion of the problem. But this widely cited figure is something of an accounting illusion because, for many goods, China is just the last stop in a complex global manufacturing chain. High-end components are imported into China for final assembly and transshipment to the United States. Those nifty liquid-crystal computer screens may say made in china but they ought to say final assembly in china. Indeed, only 20 percent of the typical product imported by the United States from China actually represents Chinese value added. Since an appreciation of the yuan is not going to affect the cost of the other 80 percent, it is going to have only a limited effect on price.

Of course, if China devalues its exchange rate, there is every reason to believe that other Asian currencies would follow. Even so, the impact is likely to disappoint those who think that the exchange-rate misalignments account for the lion's share of the United States' borrowing problems. U.S. Federal Reserve chairman Alan Greenspan is among those who recently voiced optimism that the dollar's decline to date will slice a big chunk off the U.S. deficit. Unfortunately, extensive empirical experience tells us otherwise. Middle-of-the-road estimates of how trade responds to exchange rates ...