There have been all sorts of calculations purporting to show that the renminbi isnt really undervalued, or at least not by much. But if the renminbi isnt deeply undervalued, why has China had to buy around $1 billion a day of foreign currency to keep it from rising?
The effect of this currency undervaluation is twofold: it makes Chinese goods artificially cheap to foreigners, while making foreign goods artificially expensive to the Chinese. That is, its as if China were simultaneously subsidizing its exports and placing a protective tariff on its imports.
Krugman explains it in four sentences. And this is why we need to lead the G8 into undoing any artificial Chinese advantage by imposing tariffs linked to the undervaluation of the Renminbi.
