The Currency War

Traditionally, the Chinese Yuan was pegged very closely to the US Dollar. This means that the governments made the necessary economic changes to maintain the same exchange rate. Eventually, in July 2005, the peg to the Dollar was removed, and a floating exchanging rate emerged. This means that the macro-economic policy was no longer directed at maintaining the same exchange rate, but rather the exchange rate can change. Thus it floats. The Yuan was undervalued towards the Dollar, a situation that precipitated the change to a floating exchange rate. However, the United States is now claiming that the Yuan has not appreciated enough (8% since the change), and that the Chinese government is still keeping the Yuan grossly undervalued (40%). This is to the point where Congress has asked the US Treasury to label China a currency manipulator.

What US Congress wants the Chinese to do is revalue their currency. The US claims the exchange rate is hurting their foreign debt by inflating it. The fruitless efforts of the US Treasury Secretary has led Congress to pass a bill calling for the revaluation of the Yuan or subsequent trade tariffs of 20%.

This is quite obviously a form of protectionism, where the US is using trade tariffs as the method. The apparent motives for this is to stabilize the balance of payments and to protect employment. China currently holds US$232.5 in debt, and the US hopes that by imposing the trade tariffs, their trade deficit will decrease, and they will be able to regain control of their foreign debt. Also, the politicians want to stop all of the factory jobs flushing to China. By imposing trade tariffs, the Chinese goods become more expensive, so the consumers will buy more American-made goods.

However, these tariffs carry with them great risks. These are risks that will ultimately hurt the US. Firstly, it is worth mentioning that the United States of America is rather dependant on China, trade-wise. Since the US is one of China's biggest customers, the tariffs will firstly hit American consumers. The price level will rise because of this international tax, and the American firms will become less competitive. Also, there is the potential threat of retaliation from China, which may result in a trade war. This will hurt both the United States and China.

These tariffs would thus hurt the US, and create more foreign debt, higher inflation and less competitive American firms. This is exactly what the US wanted to avoid by imposing these tariffs. The opportunity cost of imposing the tariffs and the resulting carnage aftermath is greater than the status quo. It is quite obvious here that the US is trying to maintain a market share in manufacturing. However, it is also quite obvious that China has a comparative advantage in this industry. Thus, instead of adopting protectionism, which only delays and magnifies the effects of the problem, the US should consider switching to a slightly more service-based economy. Traditionally, the Chinese Yuan was pegged very closely to the US Dollar. This means that the governments made the necessary economic changes to maintain the same exchange rate. Eventually, in July 2005, the peg to the Dollar was removed, and a floating exchanging rate emerged. This means that the macro-economic policy was no longer directed at maintaining the same exchange rate, but rather the exchange rate can change. Thus it floats. The Yuan was undervalued towards the Dollar, a situation that precipitated the change to a floating exchange rate. However, the United States is now claiming that the Yuan has not appreciated enough (8% since the change), and that the Chinese government is still keeping the Yuan grossly undervalued (40%). This is to the point where Congress has asked the US Treasury to label China a currency manipulator.

What US Congress wants the Chinese to do is revalue their currency. The US claims the exchange rate is hurting their foreign debt by inflating it. The fruitless efforts of the US Treasury Secretary has led Congress to pass a bill calling for the revaluation of the Yuan or subsequent trade tariffs of 20%.

This is quite obviously a form of protectionism, where the US is using trade tariffs as the method. The apparent motives for this is to stabilize the balance of payments and to protect employment. China currently holds US$232.5 in debt, and the US hopes that by imposing the trade tariffs, their trade deficit will decrease, and they will be able to regain control of their foreign debt. Also, the politicians want to stop all of the factory jobs flushing to China. By imposing trade tariffs, the Chinese goods become more expensive, so the consumers will buy more American-made goods.

However, these tariffs carry with them great risks. These are risks that will ultimately hurt the US. Firstly, it is worth mentioning that the United States of America is rather dependant on China, trade-wise. Since the US is one of China's biggest customers, the tariffs will firstly hit American consumers. The price level will rise because of this international tax, and the American firms will become less competitive. Also, there is the potential threat of retaliation from China, which may result in a trade war. This will hurt both the United States and China.

These tariffs would thus hurt the US, and create more foreign debt, higher inflation and less competitive American firms. This is exactly what the US wanted to avoid by imposing these tariffs. The opportunity cost of imposing the tariffs and the resulting carnage aftermath is greater than the status quo. It is quite obvious here that the US is trying to maintain a market share in manufacturing. However, it is also quite obvious that China has a comparative advantage in this industry. Thus, instead of adopting protectionism, which only delays and magnifies the effects of the problem, the US should consider switching to a slightly more service-based economy.