Oct 26 2009

Exchange rates, currency manipulations, and the balance of trade

FT.com | The Economists’ Forum | Imbalances and undervalued exchange rates: Rehabilitating Keynes

In our year 2 IB Economics class, we are beginning the part of our International Trade unit on exchange rates and the balance of trade . While the market for a particular currency reflects many of the same characteristics as a product market (i.e. upward sloping supply curve, downward sloping demand curve), the consequences of a change the price of a currency (the exchange rate) is far more powerful than a change in the price of a particular good or service in a product market.

How does the value of a country’s currency affect that country’s balance of trade with other countries? To understand this important concept, we first need to know something about the process by which currencies are exchanged when two countries trade. Let’s look at an example:

When an American consumer wants to buy an iPod that was made in China she will have to pay for it in US dollars, since that’s what she earns her wages in from selling her labor in the resource market. Apple now has the consumer’s $300, which gets split up to cover all the costs the company faced in the manufacture, distribution, marketing and sale of the iPod. Part of that $300 (say $100) will go to the manager of the factory in China where it was made.

The factory manager in Shanghai faces his own costs he must cover. He must pay rent on his factory space, interest on the loans he took out to acquire capital, and wages to the workers assembling iPods on his factory floor. The problem is, these costs are all in Chinese yuan, but he’s holding the US dollars that Apple paid him for his iPod. In order to cover his costs, the Chinese factory owner must take the $100 to a Chinese bank and swap it for RMB. The local bank that changes his money now hands the $100 over to China’s central bank (the PBOC) which prints and exchanges RMB to the bank at whatever the prevailing exchange rate is at the time.

Ultimately, China’s central bank will decide what to do with its holding of US dollars. Most of the dollars are loaned back to the United States through China’s purchase of US Treasury securities (the IOUs the US government sells to finance its deficits). China’s voracious demand for US dollar denominated assets keeps the demand for (and the the value of) dollars high on foreign exchange markets, meaning the RMB remains relatively cheap for Americans and therefore Chinese manufactured goods attractive.

China’s policy of exchange rate manipulation has upset many American politicians over the years, who often blame China for America’s shrinking manufacturing sector. A weak RMB means the cost of producing things like iPods in China is far lower than it would be in the US. By keeping demand for dollars high on the foreign exchange markets through its incessant demand for US treasury securities and other financial and real assets, while simultaneously hoarding vast reserves of US dollars in its central bank, thus keeping supply of dollars on foreign exchange markets low (see graph), China has prevented the RMB from appreciating, fueling the growth of the country’s export-manufacturing sector.

China’s currency manipulations may soon ilicit a response from the United States as president-elect Barack Obama takes office next year. Facing a recession and rising unemployment, combined with the recent appreciation of the US dollar, the pressure is on Obama to take immediate action to restore America’s manufacturing sector. According to the Financial Times blog “the Economists’ Forum”:

If the US economy takes a downturn and the dollar continues to strengthen, a resurgence of protectionist pressures is likely. This time around, these pressures could well take the form of unilateral action against competitive currencies. It is noteworthy that President-elect Obama has actively and repeatedly supported action against “currency manipulation.”

The “competitive currency” perceived to pose the greatest threat to America’s inustrial sector is certainly the Chinese RMB. Currency manipulation is a form of protectionism, which in a time of global economic slowdowns poses a larger threat than ever to both developed and developing nations’ economies alike. For this reason, the World Trade Organization may need to employ carrot and stick methods to create incentives for China to liberalize its currency controls and allow the RMB to strengthan against the dollar and other major currencies:

How would this new rule against undervalued exchange rates be incorporated in the WTO? Through negotiation. The (WTO) should place rules on undervalued exchange rates…. The US and EU have been the principal demandeurs for action by China in the past. But it is important to remember that until very recently, a number of developing countries—Brazil, Mexico, Korea, Turkey and South Africa—were affected by the competitive pressure from the undervalued (RMB). Indeed, some months ago, the Indian Prime Minister urged China to follow a more market-based exchange rate policy. For obvious reasons, more emerging market countries have not voiced their concerns, but it is possible that a coalition of affected countries could unite on this issue.

Clearly, Chinese concerns have to be addressed for any new rules to be crafted and commonly agreed… First, China’s major trading partners could pledge granting China the status of a “market economy” in the WTO contingent on it eliminating currency undervaluation and moving to a market-based system. This status would have significant value for China by shielding it against unilateral trade actions such as anti-dumping and countervailing duties by trading partners. Second, as part of radical governance reform of the IMF, which is desirable in itself, China should be offered a substantially larger voting share in the IMF commensurate with its economic status.

Discussion Questions:

  1. How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?
  2. What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?
  3. What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?

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

103 responses so far

103 Responses to “Exchange rates, currency manipulations, and the balance of trade”

  1. James Jowetton 05 Dec 2011 at 11:24 am

    # Suyeon So

    I definitely agree with your response to the 3rd question. I think that imposing a tariff on Chinese imports is definitely the way to go as it would protect domestic industries and employment. However, these industries would have to capitalise on the protection that they are getting by increasing their efficiency and lowering their costs. This would ensure that they can remain competitive in the long-run.

  2. Merve Akpinaron 05 Dec 2011 at 2:28 pm

    1) How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?
    China’s low exchanging rates makes Chinese goods and services very cheap. That situation serves the export rates of China. The adversaries of China will make less import because they will be less desirable. As a result of that the other big industries such as USA will suffer because of unemployment and trade deficit.
    2)What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?
    China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations is to protect the export rate. China is trying to prevent make his money appreciated, because they are trying to protect aggregate demand.
    3)What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?
    In order to protect domestic producers, tariffs and quotas should be imposed by USA government. Even if consumer of USA will be affected in a bad way, accepting Chinese product may create bigger problems in long run.

  3. selin tatlicanon 06 Dec 2011 at 10:29 pm

    Hi Merve, I really liked your answers. They are informative and so clear.

  4. Alexander Wallaron 05 Dec 2011 at 8:46 pm

    1. How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?

    Countries that have Industrial economies are countries that produce goods for export and therefore to make profits. This means that industrial economies can be threatened if there is another country producing the same good for a lower price. This is exactly what China is doing be devaluing the RMB. China, by not letting the RMB appreciate, is making their exports artificially cheap – so cheap that other countries producing the same good are not able to compete. Since the RMB is a very undervalued currency, goods produced in China are very cheap and therefore look very attractive to the consumer. This means that more of the Chinese exports will be purchased and fewer exports from other countries, industrial countries, will be purchased. This, therefore, decreases the revenue that industrial economies are able to generate therefore threatening the industrial economies.

    2. What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?

    Consumers will shift their resources to the producer producing the demanded good with the least cost. Consumers aim at allocating their resources the most efficiently. By China maintaining a low value of the RMB, China is artificially making all of the goods produced and exported cheaper relative to the other international producers. China is drawing consumers in to purchase the Chinese exports in order to increase their generated revenue. Also, by maintaining the low value for the RMB, China becomes an epicenter for production because it is relatively cheap to produce their.

    3. What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?

    A form of protection a government might employ would be a tariff against some goods produced in China in order to give domestic producers a fighting chance. This would level the playing field between the United States and China. My advisement to president Obama needs a preface. Since the United States’ economy is one based on importing, I would advise president Obama not to impose sanctions against Chinese goods. This is simply because China has bought up the American deficit and could release it if the United States was to impose sanctions. This would devalue the dollar and reduce American consumers’ purchasing power – the United States’ importing power. This devaluation of the dollar would diminish an already desperate economy.

  5. Alexander Wallaron 05 Dec 2011 at 8:50 pm

    @Merve:

    You say that the US government should impose protectionist efforts against China? How would China react? China has a lot of American assets held up in their reserves and could release them thus devaluing the dollar if the US was to impose such protectionist efforts.

  6. Behiye Dasdemiron 05 Dec 2011 at 10:24 pm

    1.How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?
    As China continues to undervalue its currency, the price of Chinese good would seem cheaper in comparison with the other currencies. Thus, the demand for Chinese good would increase both in the inside and outside of the country. As the demand for Chinese goods increase, the imports from China would also get higher. This causes developing countries to have dumping. That is why; the domestic firms have difficulties to raise their profit. Besides, they may have to lay-off workers or even shut down. This would cause the domestic economies, especially in the developing countries. As the unemployment rate increases, the trade deficit would increase. That is why; since the balance of trade would be destroyed, the trading partners would have hard times to cope with the problems.
    2.What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?
    By this way, China aims to increase the demand for its goods. As in the world market Chinese products are cheap to import, the exports of China would get higher. Thus, China would gain more profit and consequently, more jobs opportunities would be offered. This would lead an increase in the GDP, as well. As the total national output increases, the economy would grow.
    3.What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?
    If the WTO refuses to take action against China’s currency manipulation, the US domestic product would confound with the fact that they may have to lay off workers or shut down apart from losing profit. That is why; Obama government may follow a path which would protect the domestic producers. For instance, tariffs may be imposed. However, this would restrict the US consumers as they would be charged to pay more than before. Also, this would cause deadweight loss by loss of consumer surplus. That is why; the government may find some incentives to make the domestic prices cheaper like subsidies.

  7. gökçe gündüzon 06 Dec 2011 at 9:20 am

    1)
    Because of the low exchanging rates in china;Chinese goods and services very cheap. That situation serves the export rates of China. The adversaries of China will make less import because they will be less desirable. As a result of that the other big industries such as USA will suffer because of unemployment and trade deficit.

    2) maintaining the low value of the RMB relative to the currencies of other nations is to protect the export rate. China is trying to prevent make his money appreciated, because they are trying to protect aggregate demand.

    3)
    for protecting the domestic producers, tariffs and quotas should be imposed by USA government. Even if consumer of USA will be affected in a bad way, accepting Chinese product may create bigger problems in long run.

  8. Ece Erdemon 06 Dec 2011 at 10:00 am

    Hi Gökçe, I think you should consider about subsidies in the protectionism process rather than saying that it will cause problems for the consumers in USA, the exports of CHinese products will lead to a bigger problem if the protectionsm is not applied.

  9. Ece ERDEMon 06 Dec 2011 at 9:54 am

    1.China continues to undervalue its currency and it causes a greater demand for Chinese products and exports because it is a lot cheaper for the consumers. Thi means that in foreign countriess the aggregate demand for Chinese products will increase, and new infant industries or domestic producers will be affected badly. The demand for domestic products will fall and this will cause the industries to unemploy people because they won’t be able to pay the wages in the long term. This will lead to higher unemployement rates. This will cause the balance of trade to be destroyed and trading partners wil find it difficult to deal with it.
    2.China’s purpose is to improve its exports by undervaluing the currency. Therefore it will increase the demand. The demand for the products will increase and this will help China to increase GDP, lower unemployement levels because people will have more jobs to the higher aggeragete demand for Chinese products. This will result in economic development and higher welfare due to an increase at GDP and employement levels.

  10. Ece ERDEMon 06 Dec 2011 at 9:54 am

    people will have more jobs to the higher aggeragete demand for Chinese products. This will result in economic development and higher welfare due to an increase at GDP and employement levels.
    3.If WTO does not take action at China’s undervaluing event, the USA economy can suffer. The domestic products may have to unemploy people, even shut down companies if China countinues to earn that much profits from international trade. This is advisable to Obama that he should take some protectionist actions. Tariffs can be imposed by Obama on those products imported. This can protect the USA economy to some level but it also affects the consumers negatively as they will be paying more and they won’t prefer it. Deadweight loss by loss of consumer surplus can occur. Other than taxes, it will be more benefical to talk about subsidies if asked to offer a solution to that problem, also not leaving the consumers affected badly.

  11. Asucan Odcikinon 06 Dec 2011 at 2:24 pm

    Hi Ece,
    I think you are right about the third question that imposing tariffs could affect consumers badly as the prices in the market will go up. I did not think of subsidies in my comment but I think you made a good point about that.

  12. Jaime Ariason 06 Dec 2011 at 1:21 pm

    @ James Jowett

    Hi James;
    I agree with your answers and I believe you did a great job answering the questions.

  13. Jaime Ariason 06 Dec 2011 at 1:21 pm

    •How does China, continuing to undervalue its currency, threaten the industrial economies of its largest trading partners?
    His largest trading partner is the US, the low cost exports are the main cause of threatening US industry because simply the US producers cannot fight with the Chinese low cost products by their own and this could mean several things.
    Assuming that the US government doesn’t react using protectionist policies several things could happen not only to US industry but to the whole economy.
    The competition could be so fierce that US consumers would fire or reduce plant size in order to compete with Chinese; this might lead to the bankrupt of the company which makes unemployment to rise. If unemployment rises there will be a decrease on spending which will cause US problems but it could also cause China problems.
    •What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?
    By doing this its exports will be more attractive and sell better which will increase its GDP and China will continue growing as it does nowadays.
    •What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?
    There are several possible measures that could be taken. Maybe the most effective will be a quota which will reduce the numbers of exports.
    I believe the most efficient in this case and the most beneficial will be to impose tariffs on Chinese goods which will eventually help US economy. I would do this instead of increasing taxes.

  14. Asucan Odcikinon 06 Dec 2011 at 2:21 pm

    1) As China continues to undervalue its currency, China’s largest trading partners are threatened because of this situation severely. The first basic reason is that, when China undervalue its currency, it means that the other countries value of currency will be higher than the Chinese currency, Yuan, and because of that reason these countries can import from China a lot and also manufacture their own goods in Chinese factories because of relatively low cost of production according to their own countries. This will make China’s exports rate very high and their import rate will decrease. On the other hand, if we think of the largest trading partners in the world, this situation will make their economy dominated with imports from China and export rates will decrease a lot as their currency cannot compete with China’s cheap products and manufacturing goods. This will obviously lead to unemployment to increase and domestic production to decrease in the countries who import from China because of China’s undervalued currency.
    2) China’s most obvious purpose for maintain a low value of the RMB relative to the currencies of other nations is to protect its high exports rates. As they maintain a low value of RMB their price of goods become very cheap for other nations so these nations import from China which increase China’s export rates and by this high export rates China gains loads of revenues which is very good for maintaining economic activities in China for Chinese government.
    3) I think if WTO refuses to take action against China’s currency manipulations, Obama administration may choose to put tariffs on Chinese goods imported from China. The reason of this protectionist policy is mainly to protect domestic producers in the USA and keep unemployment lower. Moreover, quota policy can be other option for Obama administration but I don’t think quota could overcome the demand for cheap goods in the market as the quota policy does not affect the price. So in my opinion in order to keep unemployment lower and give incentives to domestic producers to continue to produce in the market of the USA, Obama government should impose tariffs on Chinese products in the market.

  15. tsekineon 06 Dec 2011 at 2:32 pm

    1. China’s continuation to undervalue its currency of RMB is a threat to the industrial economies of its largest trading partners (specifically the United States and the EU) as a low value of currency (depreciation) would result in Chinese exports being sold at a lower price. Therefore American and European manufacturers simply cannot compete with the low prices of Chinese exports. As it is stated in the article, exchange rate manipulation is in fact a form of protectionism, which would suggest that one party would benefit, while another suffers.

    2. The main reason for China maintaining the low value of the RMB compared to currencies of other nations is to make the Chinese exports more attractive for foreign consumers. As mentioned before, the depreciation of the currency leads to a lower selling price, and therefore consumers are more likely to purchase the cheaper Chinese exports rather than their domestic products, which is more expensive. At the same time, China is also able to experience growth in their manufacturing/export sector.

    3. If the WTO does not intervene in this situation/issue of exchange rate manipulation between China and the United States, the United States will most likely not have any other choice but to adopt protectionists measures themselves. Any ‘form’ of protectionism could potentially benefit and protect the producers/manufacturers in the US economy, whether it is a tariff or a quota. The United States simply need a way to restrict the significantly low priced Chinese exports in order to protect their domestic industry. However, the drawback to adopting a tariff/quota would be the increased prices for US consumers, but at a crisis that America is experiencing now, Obama should take immediate action to save its domestic industries.

  16. Talia Greeneon 06 Dec 2011 at 4:04 pm

    1. How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?
    It makes their goods cheap relative to their trading partner’s goods, which raises the demand for Chinese industrial goods and lowers the demand for foreign industrial goods.
    2. What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?
    It makes Chinese goods relatively cheap and means that it is cheaper to manufacture a goods in China.
    3. What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?
    The Obama administration could institute economic sanctions against China. I would advise him to seek multi-lateral protection, as it would present less of a chance of retaliatory policies directed towards the US.

  17. Talia Greeneon 06 Dec 2011 at 4:10 pm

    @tsekine:
    I agree that it is important to protect domestic industries at a time like this, but I don’t think that this should be the focus of the President’s policy. I think they should be more concerned with promoting growth in developing industries that will be more important in the coming years than protecting industries that have already almost been out-competed.

  18. Do?an Canon 06 Dec 2011 at 4:50 pm

    -How does China, continuing to undervalue its currency, threaten the industrial economies of its largest trading partners?

    Because of the value of currency of China its exports increases. As a result of this people will demand for the products of China more than the other countries because of the cost of production. This situation is not good for US because its exports will decrease.

    -What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?

    The main purpose is to increase the exports. As we learned in our lessons we can say that if the exports increase this means they have to produce more and if they have to produce more this means more people have to work. So employment rate is going to increase. Also this situation is good for the domestic producers because if the exports are higher than the imports they will not be effected by this situation.

    -What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?

    In this situation of course US have to apply protectionism to protect its domestic producers. As a result of this situation US have to apply quotas, tariffs and subsidies. By applying these, domestic producers are been protected and they are going to produce more.

  19. Quinn Richardsonon 06 Dec 2011 at 5:17 pm

    1.By undervaluing its currency, Chinese goods remain relatively cheaper when compared to the goods made domestically by its competitors. This essentially raises the demand for Chinese goods from overseas. Competitors suffer because their products remain expensive as the currencies in which their products are sold continue to appreciate.

    2.When China keeps the value of the RMB low relative to other currencies in the world, this essentially under-prices Chinese goods making them extremely attractive to importers in foreign countries. This stifles away demand from domestic producers in these other countries.

  20. Quinn Richardsonon 06 Dec 2011 at 5:17 pm

    3.Because the US demands so heavily on Chinese exports, the Obama administration should 'tread lightly' so-to-speak when it comes to taking action against them. In order to defer demand for its government bonds, the US could dramatically cut interest rates therefore reducing the demand for the US dollar. This would be a non-protectionist response to the problem. If the US wishes to annoy the Chinese for their actions in currency manipulation, they could impose trade barriers such as import quotas or tariffs on goods that come primarily from China. Personally I think it is not in China's favour to continue to harm US manufacturers as most of the demand for Chinese products come from the US. If Americans don't have jobs how will they be able to purchase goods from China. This also harms the citizens of China as their wages don't have the appropriate purchasing power overseas as the currency market would determine.

  21. Quinn Richardsonon 06 Dec 2011 at 5:25 pm

    @Do?an Can

    I agree that the US should attempt to find a solution to the problem of currency manipulation as this is not sustainable in the long run. However I think the US shoul be careful when it decides to make enimies of trading partners, especially ones as strong as China. The US should only resort to protectionism if efforts to convince the Chinese of their malpractices has failed. If the US wishes to make a strong point, it should unite with other countries suffering from Chinese currency manipulation.

  22. Bryan DiLauraon 06 Dec 2011 at 5:41 pm

    1. How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?
    By undervaluing their own currency, China is using almost a form of protectionism. They are artificially making their own goods look more attractive compared to their trading partner's industries. This means that they are able to export more, driving their domestic economy forward.

    2. What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?
    China's purpose for keeping the value of the RMB low is to keep costs of production in China low, allowing their manufacturing industries to flourish.

    3. What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?
    I would advise against the Obama administration using protectionist measures if the WTO refuses. This would not only create more tension with China as a trading partner in the long term, but it would also end up hurting the US consumers with higher prices(from the loss of welfare, etc.).

  23. AydaAydon 06 Dec 2011 at 10:13 pm

    1.) How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?
    The low currency value will definitely result with a fall in the prices of Chinese exports. These low prices of the Chinese exports are in fact not something good especially for the EU and USA economies, since they cannot compete with those low prices of Chinese exports. So by this way, China threatens the industrial economies of its largest trading partners like European countries and United States.
    2.) What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?
    By maintaining the low value of RMB relative to the currencies of other nations, China would be in a position that its exports would be chosen more, since the demand towards to those products has been increased. Thus, Chinese high export rates will be protected too.
    3.) What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?
    In this case, what America and so the Obama administration should do is to apply protectionism whether quota or tariffs to protect its own domestic markets. Since US consumers are chosing low-priced products which are the exports of China, domestic markets is being affected badly as they are not preferred because of their values. So that to protect them, some protectionism principles should be used.

  24. Haleigh Eppleron 07 Dec 2011 at 5:54 am

    How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?
    China's currency manipulation is protectionism because it gives the Chinese market an unfair advantage over its trading partners' economies. The advantage costs the partners GDP as firms export labor to the cheaper market in China. The export of labor results in an increase in unemployment for the effected nation causing further problems in the domestic economy.

    What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?
    China has a larger advantage because the goods can be produced cheaper. If the exchange rate were 1:1 then it may cost 5 dollars to manufacture a good; however, if the exchange rate is lower, it may only cost 3 dollars. The same good produced in Australia would cost 5 dollars.

    What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations?
    Obama could implement counter-protectionism such as tariffs or quotas to limit the trade. The limit on the trade would compensate for the trade lost to the protective advantage china gathered through currency manipulation.

    How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?
    I would advice minimal protectionist policies because of the possibility of retaliation. Retaliation may cause devaluation of the dollar or further devaluing of the RMP causing the protectionism to be useless, Policies on behalf of the US will increase the price of goods for consumers limiting domestic spending and further lowering the GDP. Strong policies would not aid either country.

  25. Mehmet M Sumaon 08 Dec 2011 at 8:37 pm

    1.The manufacturing sectors of China's trade partners suffer severely as they cannot compete with the low cost production of China due to the undervalued RMB. This leads to an increase in unemployment rate and recession.
    2. China aims to aggrandize its export sector by keeping RMB low because low Chinese exports will be much more attractive than the US or European products. This will lead to economic growth for China.
    3. If the WTO does not act against China, then the US will have to use protectionist measures on his own to increase economic activity and reduce the unemployment rate. Firstly, the US may use quotas or tariffs to reduce the Chinese exports in the country. Besides, the government may subsidize the manufacturing sector to become more competitive against Chinese exports. Lastly, The government may depreciate the US dollar to make US exports more attractive. This option seems unlikely as China has an incessant demand for US treasury securities and other financial and real assets to keep dollar high.

  26. Muhammet Murat SEKBANon 12 Dec 2011 at 8:07 am

    1.) How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?
    To keep the currencies undervalued, the prices of the Chinese goods become cheaper in foreign countries. This means that they are able to export more compare to other countries, and their domestic economy will be developed.
    2.) What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?
    The main purpose of Chine for keeping the value of the RMB low is to keep the cost of production lower. So that the products are cheaper and as a result of high exports, the domestic manufacturing industries develop.

    3.) What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?

    Obama could put some tarrifs on Chinese goods in order to decrease the China’s comp. advantage, if the world trade organization doesn’t take action. Since the US consumers are choosing the lower priced products which are mostly the exports of China, the domestic firms are affected in a negative way. So, in order to protect them some protectionist actions can be taken.

  27. […] Exchange rates, currency manipulations, and the balance of trade […]

  28. tsatoon 10 Nov 2012 at 8:47 am

    1. China is the country of low cost of labour, it is main competitive advantage, and exchange rate. Because of that a lot of countries’ companies make factories, so companies can produce their products with low cost. Consumers prefer Chinese products because just they are cheaper than domestic products. This is course leads to an increase in the domestic unemployment rate (which means people do not spend their money much) in different countries because decrease in demand for domestic products. Thereby also, increase the demand for exporting Chinese products because they are cheap, which will repeat same problem (increase rate of unemployment).
    2. The purpose of the law value of RMB relative to the currencies of other countries is to develop Chinese economy by lowering cost of production. China is the largest population in the world, therefore it is difficult to get job every single person. By lowering the cost of production, China can increase the rate of domestic employment. Chinese industries can get more revenue from foreign consumers (export products) because Chinese products are cheaper than foreign domestic products. Increasing the rate of employment, this will increase the total spending in Chinese economy.
    3. If the WTO refuses to take action against China’s currency manipulations, Obama administration can use protectionism, which are tariffs and quotas on Chinese exported products. That will lead to decrease the demand for Chinese exported products (because Obama can increase the price of Chinese exported products by using tariff or quota). However, this choice is negative for consumers because consumers want to buy low cost products, which are Chinese products. This will decrease the demand for domestic products, which gives strong damage for domestic industries (decrease total revenue, increase unemployment rate etc). However, Obama has to protect US industries, so it is great strategy to protect domestic industries and employment. Finally, it will give high pressure for China to increase the value of RMB to the currencies.

  29. tsatoon 10 Nov 2012 at 8:47 am

    @twilliam
    For the question number three, it is really interesting to read you answer. Almost everyone answer about the view from US (I means, what is positive/negative for US because of protectionism…), however, you are answering the view from China. China creates low cost products, however, right now, I believe not a lot of people are trying to buy their products. Consumers want to buy products with low cost and it has to be good quality, however, China makes low quality products. Thereby, Chinese image drop because may be using bad quality in the production of G&S. I do not know it is true or not, but it was really interesting to read, thank you. However, what do you think about American view?

  30. jzhengon 11 Nov 2012 at 7:05 pm

    1. How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?
    China, by keeping a undervalued currency, allow all international consumers the availability of cheap imports. However, it tends to “pull away” the quantity of demand from other countries and their economies, where the fall of demand can cause recessions in all the countries that import goods and services from China.

    2. What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?
    The main purpose for keeping the low value of the RMB is to keep the quantity of exports stable in order to keep a relatively high employment within the land. This can also benefit Chinese firms in terms of income profits from the high exports, and also allows the government the large sum of foreign currency reserves to intervene in the foreign exchange market when needed.

    3. What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?
    One of the main protectionist measure is already in place, technology. Any known technology that resides with the US is never given to China, this can slow down the speed of production, and can maintain the cost of production in China as new techologies can reduce the cost of production. Tariffs can also be put on the imported goods and services from China in order to reduce the quantity imported while also increasing domestic employment to some degree. The government can also benefit from the tariff incomes and use it to subsidize other firms to increase domestic production in order to reduce leakages. Expansionary monetary policy can have both positive and negative effect in this situation. With the base rates reduced, consumers will increase spending, thus demand will increase. However, currency supply increases and foreign investors might invest less in the US, thus the demand for US dollar might also drop, and so the value of dollar might drop.

  31. Stefan Josephon 11 Nov 2012 at 11:48 pm

    1. How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?

    By keeping large amounts of US dollars in their central bank, China has been able to maintain a low supply of US dollars in the foreign exchange market keeping the demand and price for the dollar higher than the RMB. China’s low interest rate has made them the most favorable source of exports for foreign consumers. The US and the EU which are some of China’s largest trading partners have to cope with China’s advantage of a cheap currency. Chinese exports are inexpensive in terms of Euros and US dollars while consumers in China will find foreign imports more expensive. American industries will see a lower demand for their goods as China with their low cost of production and cheap currency will be more favorable to foreign consumers.

    2. What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?

    A low value of the RMB relative to foreign currencies will keep demand for China’s exports high as foreign consumers will find them more affordable as their currency is more powerful than the RMB. This maintains a striving export industry in China and keeps unemployment low.

    3. What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?

    China’s provision of cheap exports to America could be considered a form of dumping as they can sell goods at a cost lower than the American cost of production. However, let’s evaluate the effect of protectionist measures the US can take against China’s cheap imports. By imposing quotas or tariffs on China’s exports, US consumers would see an increase in price for Chinese goods leading them to buy locally produced goods. However, all this does is lower the purchasing power of US consumers. Also, it could make American exports more expensive because as the price for raw materials from China would increase. This could hurt the American exporting industry as their costs of production would rise making them less competitive. I honestly think that China needs to stop hoarding US dollars in their central bank and create a fairer trading field. However, that is rather hard to do when China is focused on their personal interest and the less competition, the better.

  32. Stefan Josephon 12 Nov 2012 at 12:13 am

    To jzheng:

    Regarding question three, I also proposed imposing tariffs on Chinese exports to increase demand for domestic goods, but I thought this could increase the price of US exports that buy raw materials from China. I didn’t consider however, that the revenue generated from the tariffs could be used by the US gov’t to subsidise goods of local exporting industries.

  33. rthornton2on 12 Nov 2012 at 1:42 am

    1. How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?

    China’s decision to undervalue its currency affects the amounts of exports and imports out of the nation. Having a weak currency allows for exports to be cheaper to other nations, thus increasing the amount of exports out of China. Having a weak currency also allows for imports to be more expensive, thus decreasing the amount of imports out of China. The industrial economies of its largest trading partners suffer the consequences from China’s weak currency because their economies are flooded with Chinese exports. Also, as a result of this, there is less domestic production because they do not have sufficient demand (from China) for their exports.

    2. What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?

    The main purpose for China to maintain the low value of the RMB is to increase the appeal of Chinese exports into other nations and to reduce the appeal of foreign imports into China. This leads to increased economic activity, thus benefiting the rapidly-growing economy greatly.

    3. What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?

    As to imposing any protectionist measures, there is always an opportunity cost. The American consumers benefit greatly from the import of Chinese goods as they are forced to pay lower prices for their goods. The American producers suffer greatly from the import of Chinese goods as there is less demand for their products. Imposing a protectionist measure such as a tariff on Chinese exports may be suggested, but the benefits and consequences of these actions would have to be examined to a great extent.

  34. Anair2on 13 Nov 2012 at 3:26 pm

    1. How does China continuing to undervalue its currency and threaten the industrial economies of its largest trading partners?

    By continually undervaluing its currency, China is in a way protecting its nation as it does not let other nations compete thus keeping the demand for its exports at a high level and this is done as the products become very cheap and therefore foreign nations choose their products over others. The fact is that the products produced outside China are not as cheap as they do not have the RMB undervalued to such an extent. There this definitely poses a threat to other industrial economies of its trading partners essentially because the other nations will only be able to export certain products as most products will dominated by China’s Industry where the foreign trade market is concerned; no other nation has this same capacity to compete at China’s level where exportation is concerned. This then means that those other nations will face increases in unemployment, losses in aggregate demand and therefore will be negatively impact.

    2. What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?

    China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations was essentially to maintain the high demand for their exports and thus guarantee the purchase of their goods from other nations in the world. This will then directly cause an increase in their real national output and aggregate demand.

    3. What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?

    There are quite a few unilateral approaches the Obama administration may advocate if the WTO refuse to take action such as quotas, subsidies or tariffs. It is definitely crucial that the US take some sort of action as the Chinese dominate that field and this is impacting their respective economy negatively. If Obama chooses to impose quotas it would mean that the Chinese exports decrease in amount and thus the consumers would have less consumer choice. This indirectly may even impact some of their own industries in that China is known for making unfinished goods and exporting relatively crucial raw materials therefore the domestically produced goods would themselves face a rise in prices. So the overall effect is not too positive in that the nation experiences a decrease in purchasing power and the same effects would probably arise with an imposition of a tariff. Subsidies on the other hand will be more plausible in that the US taxes their population to quite a high extent therefore by subsidizing it may be possible however China’s exports are just so cheap that even with subsidies Chinese products may still be preferable. So in context of America’s current economic crisis, it is very difficult to make a decision however I would advise that Obama starts off with slight impositions of protectionism and then steadily increase as these measures do very much have their own set of cons.

  35. Anair2on 13 Nov 2012 at 3:47 pm

    @Muhammat Murat SEKBAN
    As per question 1 I agree in that by continually undervaluing the currency it simply means the exports will be far cheaper however do you then believe that this will indirectly affect the GDP’s and economic growth of those trading partners? For the last question seem to have decided that tariffs would be a good approach however don’t you believe that there are disadvantages with tariffs (for example some domestic firms might rely on the Chinese exports)?

  36. Konstantin Frankon 13 Nov 2012 at 9:54 pm

    How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?

    As the Chinese currency (RMB) is that low, it is very attractive for foreign trading partners to import goods and services from China. The Chinese industry benefits from this and foreign consumers benefit from cheaper prices. However, it also threatens the domestic industries as the domestic producers’ supply is decreased

    What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?

    The purpose of maintaining the low value of the RMB relative to the currencies of other nations is to keep their high level of exports. The low value of RMB makes it cheap for foreign countries to buy Chinese products and import them to their country, which increases the demand for Chinese products and benefits the Chinese economy, due to a higher net export value.

    What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?

    I think this is a very tricky question. On one hand America is probably dependent on China’s working force as they import many products from their like the iPod that also help the US economy to grow, however on the other side the Chinese industry harms the U.S industry as they can produce and export at very low prices. I think that a suitable protectionism would be a quota, that would help the U.S industry to recover and invest in new technology and allow them to participate in the market, while at the same time it does not exclude the Chinese industry.

  37. Konstantin Frankon 13 Nov 2012 at 9:59 pm

    @Anair 2

    Well, I agree with you. However, I think that the U.S could also see it as a chance that the Chinese industry specialized on the manufacturing of goods. In the meantime the U.S industry could invest heavily in the education of their unemployed people and young generations and specialize them for jobs in the tertiary or quatenary sector. The unemployment the Chinese industry is causing in the U.S is definitely a structural unemployment and can be resolved by education.

  38. jzhengon 13 Nov 2012 at 10:27 pm

    @ Konstantin Frank

    As for question 1, with China keeping the value of the RMB low, it does threaten domestic industries by reducing the productivity, thus supply. However, what it threatens more is that the employment rate will drop, and result in a decrease in consumer income and AD, and can then cause a recession.

  39. sybellevon 14 Nov 2012 at 2:53 am

    • How does China, continuing to undervalue its currency, threaten the industrial economies of its largest trading partners?
    China threatens the industrial economies of its largest trading partners because Chinese goods are more competitive in the international market. China’s undervalued currency allows manufacturing to take place in China at relatively low costs, and subsequently, Chinese industrial goods are cheaper internationally. Thus it is difficult for China’s largest trading partners to compete with China’s cheap exports.
    • What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?
    China’s purpose for maintaining the low value of the RMB, relative to the currencies of other nations, is so that its economy can continue to export goods at low prices. China’s exports are more competitive internationally, and subsequently there is a higher demand for them. This contributes to industry growth in China and keeps unemployment rates low.
    • What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?
    Obama could implement taxes or quotas on Chinese exports. If I had to advise Obama on the issue of protectionist action against China, I would encourage him to look at the American currency values and consider if they should be lowered so that American exports could prosper, as well. However, this would likely not benefit the United States, since it is a country that relies heavily on imports and the price of imports would increase if the currency value were to depreciate. It would certainly be difficult to determine the most beneficial policy, nationally and internationally.

  40. sybellevon 14 Nov 2012 at 2:59 am

    @ Konstantin Frank

    I think you made a good point that the foreign consumers do benefit from cheap Chinese exports even if the domestic industries of its industrial trading partners are threatened. I would be careful with saying the “domestic producers’ supply is decreased”, however; rather, I think you should say that as Chinese imports become more competitive and attractive, demand for imports increases and the demand for domestic products may decrease.

  41. sybellevon 14 Nov 2012 at 3:05 am

    @Anair2

    As China’s economy dominates internationally and other nations struggle to compete, do you think this could be a sign that some economic restructuring is in order? Should some countries try to focus on the production of goods and services that China cannot touch instead of trying to implement protectionist measures to make themselves more competitive with China?

    I bring this up after reading some of your ideas for the protectionist measures that the Obama administration could advocate. While I understand the need and see the United States’ need to pursue the policy that will benefit it most, I also question the repercussions of such protectionist measures. All of the measures result in deadweight loss in society, and in the long run, could lead to reduced allocative efficiency and innovation. In an international economy that is always trying to move toward greater efficiency, this seems like a step backwards.

  42. zphuaon 15 Nov 2012 at 11:04 am

    1. How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?
    The act of China undervaluing its currency threatens the industrial economies of its largest trading partners because it will increase the amount of exports going out from China and decrease the amount of imports going into China. The China will then get hold of more currencies of other countries, and hence be able to hold treasury securities of other countries. Also, since China will keep the demand for other currencies up high with its attractive prices, it would cause the value of other currencies to remain relatively high. Chinese manufactured goods will stay attractive, and unemployment will occur in similar industries of its trading partners, hence causing it to shrink
    2. What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?
    China’s purpose is to keep cost of production low, so that prices are more competitive, and can result in an increase in exports and a decrease in imports, which will improve the balance of trade. Also, domestic employment and employment in the export sectors will also increase.
    3. What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?
    The US could ban the imports of some China goods, so that domestic consumers of that specific good are forced to purchase those goods from the domestic US economy, increasing employment. However, I wouldn’t advise Obama to do this, as I think that a good trading relationship between China and US is very important. This is because the cheap imports from China is very beneficial to US citizens in the short run, and also China holds huge amounts of US treasuries.

  43. zphuaon 15 Nov 2012 at 11:09 am

    @Sybellev

    Sybelle, I think you made a very good point of the lowering of US’s currency. However, I think that if US does that China would earn less money, and they would not be happy and might take retaliation reactions against the US. Hence my advice was not to take any action to maintain a good trading relationship, which is beneficial to US.

    Vicky=]

  44. jessicakennyon 15 Nov 2012 at 8:29 pm

    1. How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?
    Because as the RMB remains at a low exchange rate, Chinese products are made relatively cheaper than the substitutes of their trading partners, for example the USA, which causes American domestic consumers to prefer buying cheaper Chinese goods than more expensive American ones. This tends to cause huge losses of profit for American industries, due to loss of consumer demand, which in turn leads to cuts in these industries’ expenses that causes high unemployment. High unemployment will cycle into a lower aggregate demand in the American economy, since consumers tend to spend less in a recession, which further injures American industries.
    2. What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations?
    China aims to promote the development and expansion of its own manufacturing sector, and raise its GDP which can then be spent by the government to make improvements in all sectors of society. This is possible because a low exchange rate makes Chinese exports relatively cheaper than the domestic goods found in other nations, which attracts consumers to the Chinese substitutes.
    3. What would be a unilateral protectionist measure an Obama administration may advocate if the WTO refuses to take action against China’s currency manipulations? How would you advise president-elect Obama on the issue of whether to take protectionist action against China in the context of the current economic crisis in America?
    The Obama administration could advocate for the imposition of quotas on Chinese goods, as long as American domestic industries are able to fill the resulting increase in demand. It is advisable that the Obama administration take some sort of protectionist action, if the WTO refuses to, because the current economic crisis will only snowball into a worse situation, as described in answer #1, if nothing is done about this unfair Chinese competition. However, for the sake of the optimum allocation of resources and of diplomacy, whatever measures are taken must take into account and allow for the continuation of imports of goods for which China has a geographical comparative advantage.

  45. jessicakennyon 15 Nov 2012 at 10:27 pm

    @zphua
    In response to question 1, I think you might have mistaken the causality between the Chinese government hoarding foreign currencies and their appreciation. You mention that “China will keep the demand for other currencies up high with its attractive prices” and that this “would cause the value of other currencies to remain relatively high” but it’s not the attractive Chinese prices that keep other currencies high. On the contrary, since there is such a great demand for Chinese products, there is a high demand for the RMB, which would make it appreciate, if it weren’t for China’s currency manipulation to buy other currencies using Yuan in order to maintain the supply of the RMB high on the market. This is what makes other currencies appreciate – the Chinese government’s high demand – , not China’s low prices.