In case you thought that the United States had a monopoly on bad economic reporting, the Financial Times is out to prove you wrong. In a column this morning, Lex sought to show that an increase in the value of the Renminbi will not necessarily lead to a decline in the U.S. trade deficit with China. The evidence is a chart showing that the large rise in the euro against the dollar since 2001 has actually been associated with an increase in the U.S. trade deficit with Europe.
What�s wrong with this story? Simple, the large rise in the euro since 2001 followed a large decline prior to 2001. The euro was born in 1999 at a value of approximately 1.17 dollars to the euro. Its current value is just over 1.25 dollars to the euro. Since inflation in the euro zone has averaged approximately 1.0 percentage point less annually then in the U.S., the real value of the euro against the dollar today is approximately the same as it was in 1999.
Trade does not adjust immediately to changes in currency values, so the deficit in 2001 was not reflecting relative currency values in 2001, but rather the values from a couple of years earlier. Since the fall in the euro was soon reversed, there was probably little change in trade patterns due to its temporary weakness. Presumably Lex knows that trade does not instantaneously respond to currency values, so why did the FT give us this chart?
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