Professor, Harvard University’s Kennedy Schoolof Government

JeffreyA. Frankel is James W. Harpel Professor of Capital Formation and Growth. Hedirects the Program in International Finance and Macroeconomics at the NationalBureau of Economic Research, where he is also on the Business Cycle DatingCommittee, which officially declares recessions. He served at the Council ofEconomic Advisers in 1983-84 and 1996-99; as CEA Member in the ClintonAdministration, Frankel's responsibilities included international economics,macroeconomics, and the environment. He currently serves on the Monetary PolicyCommittee of Mauritius and on advisory panels for the Federal Reserve Banks ofNew York and Boston.

1/Perhaps spurred by the 18% appreciation of the dollar since mid-2014 and the first signs of a resulting net loss ofAmerican exports, Congress is once again considering legislation to attackcurrencies that are seen as unfairly undervalued.

2/That China’s renminbi depreciated slightly against the dollar in 2014 is notevidence: Many othercurrencies, most notably the yen and euro, depreciated by far more last year.

3/The situation hasrecently changed, however.In 2014, net capital inflows into China reversed andturned to substantial net capital outflows. As a result, the overall balance of payments turned negative in the second half of the year,

4/There is no reason to think that this recent trend willnecessarily reverse in the nearfuture. The downward marketpressure on the renminbi relative to the dollar is easily explained by the current pattern of a relatively strongeconomic recovery in the U.S., prompting the end of a period of American monetary easing, together with a substantial slowing of economic growth in China, prompting the start of a newperiod of monetary stimulus there.

Similar economic fundamentals are now at work in othercountries, particularly Japan and euroland.

5/Roughly 95% of the value of a “Chinese”smart phone exported to the U.S. is represented by imported inputs; only 5% is Chinese value-added. The point isn’t that the trade statistics need to be corrected. The pointis, rather, that bilateral trade balances have little meaning.