Should China be forced to alter the value of its currency? POINT: U.S. politicia

Question

Should China be forced to alter the value of its currency?

POINT: U.S. politicians frequently suggest that China needs to increase the value of the Chinese yuan against the U.S. dollar, even since China has allowed the yuan to float (within boundaries). The U.S. politicians claim that the yuan is the cause of the large U.S. trade deficit with China. This issue is periodically raised not only with currencies tied to the dollar, but also with currencies that have a floating rate. Some critics argue that the exchange rate can be used as a form of trade protectionism. That is, a country can discourage or prevent imports and encourage exports by keeping the value of its currency artificially low.

COUNTER-POINT: China might counter that its large balance of trade surplus with the U.S. has been due to the differences in prices between the two countries, and that it should not be blamed for the high U.S. prices. It might argue that the U.S. trade deficit can be partially attributed to the very high prices in the U.S., which are necessary to cover the excessive compensation for executives and other employees at U.S. firms. The high prices in the U.S. encourage firms and consumers to purchase goods from China. Even if China’s yuan is revalued upward, this does not necessarily mean that the U.S. firms and consumers will purchase U.S. products. They may shift their purchases from China to purchase products in Indonesia or other low-wage countries rather than buy more products from the U.S. Thus, the underlying dilemma is not China, but any country that has lower costs of production than the U.S.

WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support? Offer your own opinion on this issue.

Explanation / Answer

Looking at this question from the perspective of China because there are so many mitigating circumstances affecting the view of the U.S. we can lay out a defensible argument as to why China should NOT increase the value of its Yuan against the U.S. Dollar.

For U.S. politicians to suggest China artificially increase the value of their Yuan against the U.S. Dollar is like a consumer telling a credit card company to reduce his balance so that he can spend more money. U.S. politicians find this as a path of least resistance because, after all, U.S. politicians aren't "elected" by Chinese citizens. This is not a "problem" China should be willing to assume nor look to solve by increasing the value of the Yuan against the U.S. Dollar. If China were to artificially increase the value of their Yuan against the Dollar, the value of their holdings in U.S. debt would be negatively affected.

Additionally, if China were to artificially increase the value of the Yuan against the U.S. Dollar, China would effectively self-impose limitations upon the purchasing power of their own currency with all other nations of the developed world while devaluing the value of any debt China holds of those countries.

in the course of addressing the issue of whether or not China should increase the value of the Yuan against the Dollar, we elected to take the most defensible position being that China should not. There is NO reason why China should artificially increase the value of the Yuan against the U.S. Dollar which would result in a benefit for China.

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