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How China’s Exchange Rate Policy Shaped the China Shock
Bumsoo Kim, Oct 07, 2026The usual story of the China shock focuses on cheap Chinese labor, rapid productivity growth, and the loss of US manufacturing jobs. Our paper adds a missing piece: China’s exchange-rate policy. By keeping the renminbi closely tied to the dollar, China slowed the normal price adjustment that would have made its goods more expensive as its productivity rose. This made Chinese exports cheaper for longer, intensified the pressure on US manufacturing, and helped generate the bilateral trade deficit as a result of consumption smoothing. Yet the same policy raised average US welfare by lowering consumer prices, even as it imposed concentrated losses on manufacturing workers.
