The relationship between China and the United States is often in the news. To re
ID: 1164302 • Letter: T
Question
The relationship between China and the United States is often in the news. To refresh your memory, here are four facts about the Chinese economy: 1. China manages its exchange rate with the dollar. 2. China runs a trade surplus with the United States. 3. The Chinese central bank owns a large number of U.S. Treasury bills. 4. Individual Chinese residents are not free to invest their savings in foreign countries as they would like. Any movement away from a managed exchange rate would probably include a relaxation of these restrictions.
Now evaluate the following claims below with three to five sentences for each. You should also feel free to use graphs or equations where appropriate. Your goal is to discuss why the claim is true, partially true, or not true at all.
i. “Cheap imports from China come a steep cost – lost jobs and lower wages for American workers.”
ii. “Over time, the Chinese government can maintain an unfair trading relationship with the United States by pegging its currency to the dollar at a low level.”
iii. “In the long run, if China continues to peg its currency to the dollar at an abnormally low value, it may incur a significant increase in its price level.”
iv. “The only way for the United States to close its bilateral trade deficit with China is to either raise national savings in the U.S. or reduce investment in new plant and equipment in the U.S.”
v. “Because China has a fixed exchange rate, it is unable to conduct discretionary monetary policy.”
vi. “If China stopped managing the value of its currency, the value of China’s currency would strengthen relative to the dollar and U.S. interest rates would rise.
Please answer all parts!!!!!
Explanation / Answer
ANSWER:
1) "Cheap imports from China come a steep cost - lost jobs and lower wages for American workers."
Explanation: I would rather say that this statement is partially true. It was found that more than 8 million workers in the manufacturing sector lost their jobs due to the import competition (when another country is able to produce and sell you goods that your country used to make, but cheaper). But, the overall decrease in the unemployment rate was very less as the number of non-manufacturing jobs grew because cheaper good were available as inputs for service sector.
2) Explanation : Its true that the Chinese government can maintain an unfair trading relationship by pegging its currency to the dollar at a low level. U.S imports a lot from a china and has more than $300 billion of trade deficit.In order to maximise export yuan is kept weak. By buying treasury bills, China invests its dollar stockpile into the safest investment. It makes the dollar demand high and gives the comparative advantage
3) It is not true, China fears that if it simply re-pegs its currency, it will not convince financial markets that the new value is the equilibrium one. This might then simply invite more speculation as to further movements of the currency, destabilizing it and discouraging capital account liberalization.It could threaten financial instability in China, which has a heavily debt-burdened, inefficient state-owned financial system
4)It is partially true as other ways to reduce the bilateral trade deficit with china are: a) By depreciating the exchange rate- A weaker dollar makes imports more expensive and exports cheaper and improves the trade balance. b) Tax capital inflows- A tax on (non–foreign direct investment) capital inflows that rises with the size of the inflow could reduce excessive borrowing for consumption and help close the government imbalance.
5) It is partially true. Between 2002 and 2008 not only no costs were incurred by sterilization operations, but that the central bank was actually able to realize a profit through foreign exchange market interventions.Based on this, it is concluded that the exchange rate target has not adversely affected the domestic orientation of monetary policy on the whole.
6)Its partially true as if China were to stop earning surplus US dollars (over and above what it needs for imports) and lending them to the US government, the dollar would fall even further (taking the yuan down with it), inflation would rise in the US, and so would interest rates.But revaluing the yuan would make China's exports more expensive and a decline in exports would slow down the entire economy.