A new Plaza Accord won't fix global imbalances

A recent commentary in The Wall Street Journal, "Why the World Needs to Force China's Yuan to Revalue", echoes a growing narrative in Western media advocating for a new Plaza Accord to address China's trade surplus. The contention is that the yuan is "deeply undervalued" due to Beijing's supposed understatement of its current account surplus and the People's Bank of China actively suppressing the currency to juice exports. The proposed solution: use tariffs to force China to revalue its currency so that global trade imbalances start correcting.

However, even critics sympathetic to the intent aren't buying the argument. Economists such as Gita Gopinath, Pierre-Olivier Gourinchas and Hélène Rey assert that currency undervaluation is only a symptom, not the cause. Without addressing the underlying imbalance, a forced revaluation will resolve nothing. It's a fair point, but doesn't go far enough. The undervaluation thesis isn't just incomplete, it's fundamentally flawed.

The assumption that exchange rates are determined solely by trade is incorrect. In 2025, China ran a $735 billion current account surplus. As Miao Yanliang notes in Project Syndicate, this surplus didn't exert appreciation pressure, but was instead offset by outbound investment, portfolio flows and activity in Hong Kong's capital markets. Dollars flowed in and out without much need for central bank intervention. The currency has indeed moved, but the real exchange rate remains stagnant due to persistently low domestic inflation. Increasing the nominal rate could lead to cheaper imports, lower inflation and a further depreciation of the real exchange rate, as warned by Gopinath and colleagues.

The "under-counting-current account surplus" thesis suggests replacing China's reported negative investment income with an imputed positive $100 billion — a 3 percent return on foreign exchange reserves, almost equal to China's net international investment position. This assumes that China earns roughly the same return on its nonofficial overseas assets that it pays on its liabilities. However, in recent years, inward foreign direct investment has generated returns on a substantial stock, while China's outward investment, focused on lower-yielding Belt and Road countries and sectors such as energy and transportation, has resulted in significant costs on its own sizeable stock.

In contrast, the United States, with a negative $21 trillion net investment position as of the first quarter of 2026, still earns positive returns in most quarters over the years. So, a large net asset position does not reliably indicate net income.

The claim that the PBOC arbitrarily sets the exchange rate is also unfounded. Since 2005, China has run a managed float: a daily parity rate based on market-maker quotes and influenced by market supply and demand, with trading allowed to swing 2 percent either side. This practice is common among countries managing their floats. Commercial banks settling foreign exchange for customers, rather than for interventions, accounted for the bulk of settlement volume. If the PBOC is using banks to suppress the yuan, why is it telling them to pare back US Treasury holdings — a classic reserve management tool? The manipulation story doesn't hold.

Moreover, the advocates of revaluation overlook a crucial point. China's export boom is driven by technological advancements rather than price discounts.

Overall exports grew 14 percent in the first seven months of 2026, but high-tech exports, including industrial robots and 3D printers, grew over 50 percent year-on-year, and drove nearly 60 percent of July's export growth. In contrast, low-value, price-sensitive exports are shrinking. A cheap-yuan thesis would have formed the opposite pattern.

Besides, China's price competitiveness is built on it's massive scale of production, complete supply chain clustering and intense competition. Currency value is not a decisive factor, so revaluation may not yield straightforward outcomes. For instance, semiconductor exports rely heavily on imported wafers, IP licenses and equipment, so a stronger yuan could reduce input costs and enhance competitiveness. Additionally, a stronger yuan might shift some production and assembly operations out of China to other countries, which, as Zongyuan Zoe Liu notes, won't reduce the US trade deficit but merely change its source.

Behind all this lies an asymmetry that a currency deal cannot touch: dollar hegemony lets the US settle its external liabilities by creating dollar credit. Changing individual currency values is meaningless without an overhaul of the international monetary and financial system.

The 1985 Plaza Accord serves as a cautionary tale. Despite the yen doubling against the dollar, the US trade deficit kept widening for two years before a brief improvement, only to resume its rise by the early 1990s. Japan's acquiescence was influenced as much by its security dependence on the US as by economic factors, and the resulting shock triggered Japan's asset collapse and prolonged economic stagnation.

Beijing has seen that episode and doesn't want a sequel. Nor would it yield to tariff threats. China is deeply integrated into global supply chains. Tariffs may change trade routes but not the world's dependence on China's supplies, as demonstrated by years of US tariffs.

From Beijing's perspective, preserving exchange-rate policy autonomy is both an economic and a geopolitical imperative.

Global trade imbalances are a reality, and China's industrial competitiveness is acutely felt by advanced economies. But pinning that on a contested "underreporting" story and then trying to muscle through a coercive currency deal won't fix the imbalance.

Worse, it will shatter the trust needed for anything that could. John Maynard Keynes saw this coming eight decades ago, and proposed an international clearing union to address systemic global imbalances. From the yen in the 1980s to the yuan today, the lesson is the same: you can't cure a disease by treating its symptoms.

The author is the Kremer Chair professor of economics at Willamette University, a nonresident senior fellow at the Global Development Policy Center at Boston University and a research associate at the Levy Economics Institute.

The views don't necessarily reflect those of China Daily. 

If you have a specific expertise, or would like to share your thought about our stories, then send us your writings at opinion@chinadaily.com.cn, and comment@chinadaily.com.cn.