Introduction
The debate between the USA and China on the matters of USD and Yuan exchange rates are regarded as the possible conflict of financial and investment interests, as trade and investment relations of these two superpowers. Some analysts are close to the consideration that the trade war is close. American politicians claim that cheap Chinese currency is the key reason for the huge trade deficit of the USA and China, while Beijing parries that the USA should have sorted out their own financial problems, instead of blaming the others. Further relations will depend on the negotiations, as well as the compromises of both parties.
Executive Summary
The exchange rate of the US dollar to the Chinese Yuan became the reason for the trade conflict. Hence, the US government claimed that China deliberately lowers the course of the Yuan, while this creates an essential deficit in the budget of the USA. Therefore, the exchange rate of USD was lowered, and the US government claimed that the Chinese government increased the rate of CNY. China, in its turn, is not interested in lowering the exchange rate of USD towards CNY, as it may have catastrophic consequences for both economies.
Analysis and Discussion
History of exchange rate
Considering the fact that the USA is worried about the low exchange rate of the Chinese Yuan, economists started lowering the exchange rate of the US dollar. Therefore, this caused dissatisfaction with the Chinese side. The dynamics of the currency exchange rate are given in figure 1. Therefore, the necessity to stimulate the growth of CNY is closely linked with the possibility of decreasing the trade deficit of both states. However, such growth may be challenging (if not deadly) for most Chinese exporters. (Davis, 14)
China’s Maintenance of the Exchange Rate
First, Chinese authorities stated that the increase of the Yuan exchange rate will not resolve US economic problems. China is going to maintain the regulated floating exchange rate of its national currency by developing the Chinese economic system, giving special attention to the economic interests of the State. (Lo, 78)
Therefore, the People’s Bank of China declared the intention to activate the exchange rate mechanism reformation of the Yuan and increase the measure of its flexibility. This should be performed by considering the constant restoration of the global economy, and the improvement of the domestic market economy. Western States interpreted this intention as the readiness of PRC to continue the Yuan revaluation. (Posen, 10)
U.S. View
The key point of the US view on the problem of the USD-CNY exchange rate is based on the statement that Yuan is unreasonably underestimated by Chinese economists. Hence, American congressmen originated a precise plan of solving this problem. Senators Charles E. Schumer and Lindsey O. Graham developed a legislative project where they emphasized that the USA would be able to impose dues for some Chinese goods. By their calculations, the 40% increase of the Chinese Yuan exchange rate will help to lower the deficit of the USA – China trading budget. (Bottelier, 38)
American legislators claimed that President Barack Obama showed firmness towards Chinese currency policy. The influence of currency manipulations of China can not be overestimated. Underestimation of Yuan provides the maintenance of Chinese companies and creates barriers for foreign competitors. Therefore, in accordance with Duoyou (8), it should be emphasized that the necessity to overcome this manipulation is essential:
For years, the Chinese government has slowly tightened rare earth element export quotas but has recently taken these unfair trade practices to the next level, with a 72% reduction in the export quota level for the second half of 2010. Then beginning earlier this month, the Chinese government cut the quota limit an additional 35% for the first half of the year. According to a GAO report, the Chinese government has also increased export taxes on rare earth elements by 15% to 25%.
In the light of this fact, it should be emphasized that strict restraints and imposing of tariffs are effective enough for the US economy, as a limited supply of rare minerals has created a shortage of these materials supply in the rest of the world.
China’s View
In fact, the conflict may be aggravated if the US Treasury publishes the report, where PRC may be regarded as a currency exchange manipulator. This may be the beginning of a trade war between two Sates, however, US government restrains from such an uncovered criticism. (Goodfriend and Eswar, 84)
Market players are assured that the Yuan increase is not likely for the nearest 6 months. This is explained by the fact that Beijing is not able to undertake these measures while US criticism is too aggressive. University of International Business and Economics professor Ding Zhijie considers that US blackmailing is counterproductive, while any compromise from the side of PRC will be regarded as concession of the Chinese government made under US pressure. However this is unacceptable. Professor Zhijiealso considers that in the case of trade war between PRC and USA, the latter will lose inevitably. He emphasizes that if the war starts, it will negatively influence the American economic system, and this may cause recurring recession for the USA. (Yi, 302)
The growth of Yuan would be a catastrophe for the Chinese exporters. Such a claim was emphasized by China Council for Promotion of International Trade. The council has surveyed opinions of more than a thousand exporters in twelve spheres. As Zhang Wei, the head of this organization, emphasized, exporters in most labor intensive spheres, such as clothes and furniture manufacturing, work with small income margin – about 3%. If Yuan exchange rate growth, these companies will face the direct risk of bankruptcy. Therefore, the consequences for these companies will be catastrophic. (Highfill, 78)
US China Relations
In fact, China is regarded as the key trading partner of the USA. Lots of American investments maintain PRC economy, and the beginning of the trade war will have catastrophic consequences for the economies of two states. If US economy fails, the national debt growth, while another financial crisis is inevitable. Therefore, the USA are reluctant to resort to uncovered and aggressive criticism of the Chinese economic system.
Regardless of the fact that IMF has confirmed that Yuan was about 25% underestimated, the possible rebalance of Chinese economic system may have unpleasant consequences. Hence, as it is stated by AFP (3):
A structural reduction in the balance of payments surplus was already unfolding thanks to steps taken to boost consumption, disagreeing with an assessment by IMF staff that the Yuan was substantially undervalued. This does reflect a softening in the board’s position about the degree of adjustment that is needed in the Chinese exchange rate regime.
Therefore, there is no need to declare PRC a manipulator, as Chinese economy is the integral component of the world trade and currency exchange system, while its restructuring, and possible bankruptcy of most Chinese exporters will cause restructuring of the entire global economy. Moreover, Chinese and US economies are interdependent, therefore, USA is not interested in aggressive measures of China, while all the claims may be regarded as an attempt to resolve domestic economy problems. Additionally, imposing tariffs and dues for Chinese goods will not be an effective solution of the problem, as bankruptcy of Chinese exporters is quite evident.
As for the economic forecasts for the year 2011, it should be stated that regardless of all the protests and arguments, China and USA will inevitably reach agreement in the trade policies, as both are interested in fruitful and effective solution. As it was emphasized by Wheatley and Wroughton (2):
China’s economic landscape for the year 2011 will feature more policies and regulations geared toward reducing the impact of the global economic crisis. This year will mark the debut of China’s 12th Five-Year Program, which features many policies aimed at stabilizing China’s economy. Although the country has seen explosive growth in recent years, there are still some uncertainties regarding China’s economy; 2011 will prove to be a test for China’s most recent policies.
Author’s View
China agrees that restructuring of the Chinese economy and reformation of US – China trade relations is the only reasonable alternative for resolving the appeared conflict. However, if tariffs are imposed, the USA may lose their most reliable trade partner, and China will not be able to fulfill the terms of the trade contracts. Hence, considering the fact that PRC and China has concluded export contracts for at least $ 45 billion, some of these contracts may fail, and both will lose from such a failure.
Conclusion
The US – China currency exchange dispute originated the necessity to improve the financial systems of both states. In fact, both do not consider themselves responsible for the appeared financial problems, nevertheless, both agreed to negotiate and reach an agreement. While exchange rate changes may be catastrophic for China, this will inevitably cause chain reaction, and the USA will also appear among losers in this challenge.
The studies of economic experts have revealed the fact that neither China nor the USA are not interested in the worsening of trade relations, that it why the USA is reluctant to make an official statement for China, while Chinese economists are not going to compromise. The conflict may be resolved by negotiations, otherwise, the trade war is too likely.
Recommendations for Further Research
In order to realize the consequences of Chinese economy restructuring, the domestic economic processes should be studied, as well as the foreign trade relations of China with the rest of the world. China is involved into manufacturing of mass consumption goods, while bankruptcy of these manufacturers may cause essential deficit of these goods on the global market. Hence, manufacturing tendencies and processes should be studied.
As for the matters of tariffs and dues that may be imposed, it is evident that both sides will lose, therefore, the economic systems of both parties will be endangered. Consequently, the possible alternatives of economic levers should be reviewed from the perspective of the USA – China trade conflict.
Works Cited
AFP. “China to maintain floating exchange rate”. BusinessDay. smh.com.au. 2010.
Bottelier, Pieter. “China’s Exchange Rate and Us-china Economic Relations.” The China Business Review. 2010: 38.
Davis, Virginia, and Carlos Yi. “Balancing Foreign Exchange.” The China Business Review 2010: 14.
Duoyou, Jin. “China’s Economic Forecast for 2011”. Beijing Review.Com.Cn 2011. Web.
Goodfriend, Marvin, and Eswar Prasad. “China’s Currency Crunch: Why China Needs to Adopt a Floating Exchange Rate.” Foreign Policy. 2010: 84.
Highfill, Hanett. The US-China Exchange Rate Debate: Using Currency Offer Curves. Bradley University. Peoria IL 2011.
Lo, Chi. “China’s Yuan Decision: The Economic Costs of the Inflexible Exchange Rate Now Outweigh Its Benefits.” The International Economy Fall 2010: 78.
Posen, Adam S. “Avoiding a Currency War: How a New “Dual-Key” Exchange Rate System Could Help the United States, Japan, the Eurozone-And China-Find a Way Out.” The International Economy Summer 2010: 10.
Yi, Jingtao. “Changes in China’s Exchange Rate Policy and Future Policy Options.” China: An International Journal 4.2 (2010): 302.
Wheatley, Alan; Wroughton, Lesley. IMF split in China yuan exchange rate debate. Reuters. 2010. Web.
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