Posts tagged dispute

U.S. vs. China: Currency and Trade Dispute

Historically, China used the fixed exchange rate for their currency Yuan over almost 50 years. Of course, China has discontinued its inflexible practice from the start of July of 2005. Instead of the fixed exchange rate, they employed a flexible exchange rate system. However, it wasn’t 100% flexible or floating because of the Chinese government’s intervention in the currency exchange market. What the government would do is that they would use their reserves of currencies to ‘manipulate’ or manage the currency exchange rate to be at a certain level. Exchange rate is a ratio between the value of two currencies and it is a method to translate the value of one currency into another.

China armed with undervalued currency and its huge industrial factories and infrastructures, it gains enormous amount of surplus in current account against United States. The surplus in current account means that the country is exporting more than it is importing. Therefore, China is gaining lots of US dollars from the trade. If you look this at the American point of view, US is losing in terms of current account against China. US is importing more than it is exporting. The imbalance in the current account in both cases (surplus and deficit) could create some problems. For deficit in current account, the country will experience in large amounts of payments losing to the foreign country. So US will be losing lots of its payments and interests to China. For surplus in current account, it is considered ‘desirable’ compared to the deficit in current account, however, it could mean that the country is not experiencing the highest possible standards of living. Also, it could be seen as economy’s under-performing. Also, it exerts pressure on the exchange rate to appreciate the currency of the country.

As you could see, the fixed exchange rate could cause a problem of shortage in the currency supply. This would generally push the exchange rate upwards, but the fixed rate block this. Therefore, the shortage in the supply of the currency occurs.

What would have happen if the Yuan got stronger and appreciated? It would decrease the exports of China dramatically. Conversely, it would increase the imported goods to China. This will ‘fix’ the imbalance and lower the surplus in current account against United States. In the point of view of Americans, this will increase their exports to China and decrease the imports due to increase in the price. This would be beneficial for both countries’ balance of payment, however, China refuses to appreciate their currency. It is because the weak Yuan stimulates exports to US and this is the key engine for China’s enormous economic growth. They think that the surplus in the current account is a good thing, however, as it was mentioned there are problems with it also.

In conclusion, China’s currency policy is creating an imbalance in the trade between United States and China. Also, it is creating the imbalance in the balance of payment. It would be idealistic if China gave up their under-evaluation policy. However, it will increase the unemployment rate in China as the exports decrease and the number of workplaces in China decreases. Conversely, this will be beneficial for United States for it will lower the unemployment rate by the increase in exports and increase in the number of workplaces.

Resources:

Council of Foreign Relations – Confronting the China-US Economic Imbalance

Wikipedia – Fixed Exchange Rate

Graph from Triple AAA Reading – Fixed Exchange Rate

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US vs. China – Currency Dispute

New York Times: Click Here

BBC News: Click Here

According to New York Times, the Obama administration is pressuring China to stop the devaluation of yuan, a policy that fuels its persistent trade gap with the United States.

Obama administration claims that China is artificially manipulating its currency to boost up its export to US. However, Chinese premier Wen Jiabao has denied that its currency is artificially devaluated.

Why are United States and China growling at each other for this issue? It is all about trade: Export and Import.

As many of you know, China is one of the biggest exporters. You may at least have a random product that is made from China. China gets all the ‘income’ or money from exporting its goods to other foreign countries, especially United States. So it is important for China to have yuan to USD exchange rate lower in order to export a lot of their stuffs to United States. It makes their products cheaper, so they gain a great price advantage over United States.

In United States point of view, this could be disturbing to them. Obama administration has promised to make like 2 million job places for its people. However, excessive import from China is one obstacle to their economic recovery. Also, United States have lots of exporting companies that are losing the price competition to Chinese exporting companies. So, Obama administration is pressuring China to raise their exchange rate. Obama administration also fears that China is stealing American jobs.

As for China, there is no way that they are going to reevaluate their currency even if they are artificially manipulating it. The export is the main steam engine of China’s economic development so it will most unlikely give up on the low yuan. For United States, their ‘precious’ money goes into Chinese government’s pocket, which they think it should be used in order to recover their economy. They are importing more than what they are exporting to China.

In conclusion, I don’t think China will ever reevaluate its currency even if they are actually manipulating it. This dispute is just aggravating the US-Chinese relationship.

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