The Real Problem of Global Trade: How China's Currency Manipulation Distorts the World Economy

The Neglected Root: Currency Undervaluation and Global Trade Imbalances

When G7 leaders gathered in Évian, France, French President Emmanuel Macron attempted to highlight the widening trade imbalances as a global economic issue. However, the G7 is likely to once again overlook one of the key drivers: the currency undervaluation of large Asian economies—especially China. This neglect is not accidental but a systematic policy blind spot, with consequences that are distorting the global trade landscape.

Since the burst of China’s real estate bubble in 2021, the depreciation of the renminbi has become a core tool for Beijing’s shift toward export-oriented growth. By maintaining a narrow trading band through state-owned banks and implementing capital controls, China’s central bank effectively controls the exchange rate directly, allowing it to weaken persistently against the US dollar. As a result, China’s overall trade surplus has tripled since 2018. Moreover, China ships intermediate goods—especially high-tech components—to neighboring countries for final assembly to circumvent US tariffs, further amplifying the surplus.

The Chain Effect of Asian Currency Competitive Depreciation

China’s approach has forced other Asian economies to follow suit: the currencies of South Korea, Taiwan, Japan, and others have fallen to historic lows. Asia’s overall trade surplus has reached $1.5 trillion, the highest as a share of global GDP since 1945. This regional currency undervaluation is not market-driven but a product of policy choices. For instance, the South Korean won remains weak despite record trade surpluses; Taiwan’s new Taiwan dollar has further depreciated even as its chip exports surge.

Europe’s automotive, chemical, and steel industries are under direct pressure from a “second China shock.” This is precisely why Macron is pushing the G7 to focus on trade imbalances. However, both in the US and Europe, there is still strong resistance to incorporating exchange rate diplomacy into trade discussions.

Historical Lessons and Contemporary Puzzles

Looking back, exchange rate adjustments were once a core tool for balancing trade. The Bretton Woods system was built on the principle of fixed but adjustable exchange rates. The 1985 Plaza Accord successfully weakened the US dollar through coordinated intervention, helping to shrink the US trade deficit. From 2005 to 2014, the renminbi appreciated by 40% in real terms, reducing China’s surplus from 10% of GDP to less than 2%. These experiences prove that exchange rates have a real and lasting impact on trade.

However, the International Monetary Fund (IMF) and G7 now tend to believe that exchange rate changes will be offset by domestic price levels. But empirical evidence points to the opposite: domestic prices are rigid and adjust slowly. The IMF’s recent assessment of China’s economy did not even mention the role of state-owned banks in maintaining a narrow renminbi trading band, let alone analyze its policy implications. This systematic neglect of the exchange rate dimension stems from an outdated theoretical assumption and bureaucratic inertia.

The Economic Costs of a Policy Blind SpotThe economic agenda of global rebalancing initially championed by US Treasury Secretary Bessent has quietly faded, replaced by the hollow phrase "constructive strategic stability." The US fiscal deficit has once again exceeded 6% of GDP, and the surge in AI-related capital goods imports will only further widen the trade deficit. Meanwhile, through a combination of central and local government subsidies, China has achieved scaled production in cutting-edge technology—a fact that Washington reluctantly acknowledges but the IMF continues to ignore.

At the heart of the current predicament is this: there is broad recognition of the severity of the problem, yet a refusal to accept the most direct solution—ending deep currency undervaluation. The communiqué from the G7 finance ministers' meeting in May only emphasized "shared interests," without even mentioning the role of RMB undervaluation in boosting exports. Another IMF report on the causes of imbalances is even less likely to convince Beijing to abandon its export dependence.