ECON3564 - CER - Chinese Currency Manipulation


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ECON3564 - CER - Chinese Currency Manipulation

  1. 1. Asif MalikEcon3564 – Sec002Dileonardo – TR 9:30-10:50amOctober 2, 2011 Chinese Currency Manipulation The senate blames the Chinese for undervaluing their currency by as much as 40 percent.Beijing denies that its exchange rate is responsible for the huge trade deficit that the UnitedStates has with China. Even thought China’s economic policy has damaged Americanmanufacturers and has taken away jobs; lawmakers don’t seem to have the political-will to passthe bill. By selling its own currency and buying up foreign reserves like the United States dollar,China has essentially pegged their currency’s value (the Yuan) to the dollar instead of allowing itto move freely in foreign exchange markets. Since the Chinese currency appears weak tointernational investors, it cheapens the price of their exports and makes the Yuan more attractiveto international buyers by undercutting competitors. Since the Chinese economy is export-driven;their cheap currency has allowed their economy to grow rapidly. Most industrialized nations believe that China’s rapidly growing economy will not besustainable and disastrous for global economics. It is feared that China’s inflation could ripplethrough the rest of the world which would drive up price on goods at a time when othereconomies will be struggling to get back on their feet. Most nations believe that the Chineseeconomy would “crash-land” into a massive slowdown and hinder global recovery. Treasury Secretary Timothy Geithner has been urging G-20 nations to take strong actionagainst currency manipulation. Mostly due to the fact that currency manipulation has affectedmany Americans; the United States imports more goods than it exports while China has a trade
  2. 2. surplus. This keeps American manufacturers from creating jobs at home. Hence, PresidentObama intends on doubling American exports within the next 5 years. Under pressure from the United States, China did take steps to allow for some flexibilityin the exchange rate. But the Yuan only rose a few percentage points and still remainsundervalued against the dollar. The bill has two main components where the legislation wouldrequire the Treasury to determine only that another country’s currency is misaligned, and thengive its government 90 days to make the necessary corrections before countervailing duties areimposed. The bill will also make it easier for specific industries to petition the CommerceDepartment for redress under claims that the misaligned currency of another country amounts toan export subsidy. In my perspective, issuing tariffs and/or subsidies on imports that heavily impact thedomestic economy is what needs to be done. If the United States continues to hold back and waitfor the Chinese to honestly rate their currency, then we’ll be in another Great Depression. I thinkthe government, especially the lawmakers, should take swift action against currencymanipulation from foreign competitors. American citizens are suffering from unemployment andthat number continues to grown because politicians don’t have the will to stand up against theChinese and tell them to honestly rate their currency. American citizens are losing jobs and domestic manufacturers can’t export productsbecause they do not possess enough financial resources to hire new labor. Since their foreigncompetitors have an advantage over them when it comes to costs compared to other nations. Ifdomestic production cannot compete with foreign production, then we will begin to lose jobsfaster and give them up to our foreign competitors. It would be wise to implement higher tariffson nations whose currency appears cheaper than ours. Hence, whenever a competitor wants to
  3. 3. enter our domestic industry, that entity is given a tariff that would equal the cost of domesticproducts. However, there are always loop-holes that huge corporations want o exploit. Somedomestic companies might outsource their jobs to China and use their cheap labor force tomanufacturer products. By doing so, they will be able to bring in cheaper products under theirname. If the United States were to impose tariffs on any imports, regardless if the company isdomestic or not, coming in from foreign locations then I’m sure competition would once againtake place in the United States and employment would rise. Most of my recommendations might not go through because there’s concern that a tradewar with China would remove incentives for China to improve its record on intellectual propertyrights or cooperate in easing tensions with North Korea. There are some groups here in theUnited States who are against the bill because they fear that it would raise prices for Americanconsumers. Even still, China denies that the exchange rate is the cause of the huge tradeimbalance, saying that the United States could help itself by lifting a ban on sales of hightechnology goods.
  4. 4. REFERENCES1.