In the run-up to this weekend’s G20 meeting in Huntsville, Ontario, much ink has been spilled regarding the value of the Chinese currency. Economists, pundits and observers of all stripes have taken positions on various sides regarding the question of how much and how fast the yuan (or Renminbi, if you prefer) needs to appreciate against other major currencies. And, of course, how willing Chinese authorities are to allow this to happen.
Hypothetical scenarios projected in some circles of a rapid appreciation of 40% have China’s export competitors salivating. Basic trade theory holds that by hiking the value of the yuan, Chinese exports become more expensive, making competing products made in countries such as Mexico that much more cost competitive. Gaining ground of this type is seen as critical in the hotly disputed U.S. market for goods such as appliances and electronics. Trade data for 2009 suggests that Mexico is already gaining some overall market share from China in the United States, and we have touched on the relative cost competitiveness between Mexico and China in this space before.