Tension Between The US and China

The economic relationship between China and the US is very strained at the moment. China has a managed exchange rate system, which means that there is generally a floating exchange rate. However, when they want to avoid sudden fluctuations, the government will intervene. China’s managed exchange rate system has infuriated other countries, such as the US and Brazil. The US is saying that China is taking advantage of other countries by allowing a current account surplus. When the US trades with China, it is “destroying jobs and limiting growth”. Also, the high demand for Chinese exports increases competition with other countries, including the US. The competition gets very hard to overcome for other countries when China is able to change its currency to better suit its needs.

In the diagram above, the current account surplus in China is displayed. A current account records the imports and exports of goods and services and the flow of income. A surplus in the current account is a situation where there are more exports than imports. China has a surplus because its inflow of money is greater than its outflow. At first, China was not open to international trade. The quantity of their currency demanded was at Q­1 and the exchange rate between the US and China was at P1. After China opened to international trade, it started to export a lot, which would increase the demand of its currency. Since more people want China’s exports, they have to sell their own currency and buy the Chinese currency. The demand of Yuan shifted up from D1 ­to D2. This increased the quantity of Yuan and raised the interest rate. As a result of the increase in the exchange rate, the Yuan appreciated. Appreciation is when the value of a floating currency rises. This makes the Chinese currency more expensive for other countries when they import from China.

A weak dollar would generally by beneficial for the US. First of all, it would increase their exports. This is because it would be cheaper for other countries to purchase the US’s exports. Since it is cheaper to buy American goods, the purchasing power for American goods and services in the foreign market would increase. With increasing exports, the US could lower the current account deficit. A deficit is when there is a greater amount of imports than exports. A strong dollar would decrease the demand for the US currency and the country’s exports. The US would export less because it would become more expensive to foreign buyers. Since the US would export less and import more, the current account deficit would become even greater. Since the US would export less, this allows China to export more, which would make its current account surplus bigger, but that doesn’t seem to be bothering anyone in China.

If China had a stronger Yuan, the same thing would happen that would in the US. The exports would decrease because they would become more expensive for foreign consumers. This would decrease China’s current account surplus. As the export levels decrease, the import levels will increase. Included in the imported goods are capital goods and consumer goods, which can be very useful. A weaker Yuan would increase China’s current account surplus. This is because China’s goods would become cheaper, and countries would want to trade more with China. Their import level will increase even more. This hurts the US because it could decrease the demand for the US dollar if more countries want to import from China.

I think that China’s currency policy is extremely unfair. China is going up in rank in terms of the biggest economy, and its enormous amount of exports intimidates other countries. Not only that, but China can greatly change its exchange rate if it ever felt a disadvantage (which it shouldn’t). Other countries are getting very frustrated at the unfair advantage that China has. If it is possible, I think that China should get off the managed exchange rate system and switch to the floating exchange rate system.

 

 

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One Response to “Tension Between The US and China”

  1. […] Data Response: Tension Between the US and China […]


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