May 25 2007

China’s Vice Premier talks basic economics

Wu: Large yuan rise would hurt China — Shanghai Daily | 上海日报

China’s Vice Premier Wu Yi defends China’s currency controls in Washington:

The yuan’s value isn’t the cause of the deficit, Wu said yesterday at a
dinner in Washington attended by US Treasury Secretary Henry Paulson
and Federal Reserve Chairman Ben S. Bernanke.

About 85 percent of China’s surplus with the US is from foreign companies
exporting products no longer made in the United States, such as shoes,
she added.

So, America’s trade deficit is not because of a historically weak Yuan, rather because America imports shoes made in China. VP Wu should look more closely at her audience; she’s preaching to the choir with Paulson and Bernanke in attendance; and I doubt they’re swallowing what she’s dishing up. Of COURSE the trade deficit is because America imports “products no longer made in the United States”. But why do they do this? Uhm, could it be because of the historically weak Yuan? Looks like VP Wu could use a refresher in her principles of Macro course.

Now the US is threatening new trade barriers if the Chinese do not allow the Yuan to appreciate more on foreign exchange markets.

“Large scale yuan appreciation will have a negative impact on China’s
economy,” Wu said, adding that trade protection would hurt relations
between the US and China.75 RMB in Shanghai

China’s increasing of the yuan’s flexibility may slow growth and cut into profits in Chinese firms. However, new barriers to trade with its largest trading partner will do the same. China’s liberalization of industry should now be accompanied by a similar liberalization of financial markets. A more balanced current account will allow China’s economy to begin growing at a more sustainable rate and help to allow China’s middle class access to the quality goods they demand from abroad.

Most importantly, American teachers in China will have access to more affordable breakfast cereal and quality coffee, which at current exchange rates cost more than I like to think about.

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

4 responses so far

4 Responses to “China’s Vice Premier talks basic economics”

  1. Mike Fladlienon 30 Sep 2007 at 8:23 pm

    would someone show me the econ 101 model that explains how the Yuan is traded against the dollar? i just can't figure it out…please send comments to: dogbreath@machlink.com

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    China’s Vice Premier talks basic economics | Economics in Plain English