Comments on: Exchange rates, currency manipulations, and the balance of trade http://welkerswikinomics.com/blog/2009/10/26/exchange-rates-currency-manipulations-and-the-balance-of-trade/ for students and teachers of AP and IB Economics Fri, 12 Mar 2010 01:36:41 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Theresa http://welkerswikinomics.com/blog/2009/10/26/exchange-rates-currency-manipulations-and-the-balance-of-trade/comment-page-1/#comment-9325 Theresa Mon, 30 Nov 2009 15:35:20 +0000 http://welkerswikinomics.com/blog/2008/11/14/exchange-rates-currency-manipulations-and-the-balance-of-trade/#comment-9325 1.How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners? A given amount of foreign currency buys more Chinese goods when the RMB has devaluates. This means that Chinese goods seem cheaper. China's low currency keeps the foreign demand for it's exporting products high. It therefore has an advantage to 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? This is benefitial for China's economy as they are keeping the aggregate demand for their products high (through the large demand of their exported goods). They can build up a current account surplus and save this in the official reserves account or invest in foreign economies. 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? A tarrif could be imposed on Chinese imports. This would not benefit consumers though, as they are then not profiting from the higher prices of the chinese manufactoring sector anymore. 1.How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?

A given amount of foreign currency buys more Chinese goods when the RMB has devaluates. This means that Chinese goods seem cheaper. China’s low currency keeps the foreign demand for it’s exporting products high. It therefore has an advantage to 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?

This is benefitial for China’s economy as they are keeping the aggregate demand for their products high (through the large demand of their exported goods).
They can build up a current account surplus and save this in the official reserves account or invest in foreign economies.

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?
A tarrif could be imposed on Chinese imports. This would not benefit consumers though, as they are then not profiting from the higher prices of the chinese manufactoring sector anymore.

]]> By: Marc Lemann http://welkerswikinomics.com/blog/2009/10/26/exchange-rates-currency-manipulations-and-the-balance-of-trade/comment-page-1/#comment-9107 Marc Lemann Wed, 25 Nov 2009 05:42:14 +0000 http://welkerswikinomics.com/blog/2008/11/14/exchange-rates-currency-manipulations-and-the-balance-of-trade/#comment-9107 China's apparent pegging of the USD threatnes the economies of its largest partners because it keeps demand for goods produced in China very high, which in turn affects the manufacturing sectors of other nations which cant produce and export their goods at such low costs. China purpously does this, to maintain their manufacuring sector with high demand, and also benefiting their balance of payments greatly with billions of surplus in their current account. With that surplus of money from the current account, they can invest in american assets, and store many Dollars in its Central Bank, which decreases the amount of dollars in the market and keeps it valuable. In Obama's case, protectionist measures such as tarrifs or quotas on Chinese exports could be placed, to decrease the high demand for those goods. This would not benefit the consumer though. An investment tax similar to what Brazil has done could be imposed, taxing Chinese investment in US assets, which could lead to China changing their USD into other currencies, to invest elsewhere. I would attempt to remove all protectionist measures, and advocate for floating excange rates, as currently, even if the USD deppreciated, and made it more expensive to buy Chinese imports, the RMB would stay practically pegged to it changing nothing. China’s apparent pegging of the USD threatnes the economies of its largest partners because it keeps demand for goods produced in China very high, which in turn affects the manufacturing sectors of other nations which cant produce and export their goods at such low costs.

China purpously does this, to maintain their manufacuring sector with high demand, and also benefiting their balance of payments greatly with billions of surplus in their current account. With that surplus of money from the current account, they can invest in american assets, and store many Dollars in its Central Bank, which decreases the amount of dollars in the market and keeps it valuable.

In Obama’s case, protectionist measures such as tarrifs or quotas on Chinese exports could be placed, to decrease the high demand for those goods. This would not benefit the consumer though. An investment tax similar to what Brazil has done could be imposed, taxing Chinese investment in US assets, which could lead to China changing their USD into other currencies, to invest elsewhere. I would attempt to remove all protectionist measures, and advocate for floating excange rates, as currently, even if the USD deppreciated, and made it more expensive to buy Chinese imports, the RMB would stay practically pegged to it changing nothing.

]]> By: forex robot http://welkerswikinomics.com/blog/2009/10/26/exchange-rates-currency-manipulations-and-the-balance-of-trade/comment-page-1/#comment-9022 forex robot Tue, 17 Nov 2009 12:41:54 +0000 http://welkerswikinomics.com/blog/2008/11/14/exchange-rates-currency-manipulations-and-the-balance-of-trade/#comment-9022 Great read, you can always learn something new about forex! Great read, you can always learn something new about forex!

]]> By: Bastien Vogt http://welkerswikinomics.com/blog/2009/10/26/exchange-rates-currency-manipulations-and-the-balance-of-trade/comment-page-1/#comment-8879 Bastien Vogt Sun, 01 Nov 2009 19:29:40 +0000 http://welkerswikinomics.com/blog/2008/11/14/exchange-rates-currency-manipulations-and-the-balance-of-trade/#comment-8879 Although it is in the interest of a nation to have balanced trade with other countries, this cannot be said between the US and China. This is because the exports from China to the US create a trade surplus for China. In the case of a recession the price level in the US would decrease, as the article states, which would cause a depreciation of the USD. This would mean that Chinese products would seem more expensive to US consumers thus harming the Chinese economy, because there would be less demand for Chinese goods. If there are no improvements in the US economy then the USD will depreciate decreasing imports from China to the US, in the long run this could mean a trade balance between the US and China as the demand for Chinese goods will decrease and Chinas demand for Us goods may increase. Although it is in the interest of a nation to have balanced trade with other countries, this cannot be said between the US and China. This is because the exports from China to the US create a trade surplus for China. In the case of a recession the price level in the US would decrease, as the article states, which would cause a depreciation of the USD. This would mean that Chinese products would seem more expensive to US consumers thus harming the Chinese economy, because there would be less demand for Chinese goods. If there are no improvements in the US economy then the USD will depreciate decreasing imports from China to the US, in the long run this could mean a trade balance between the US and China as the demand for Chinese goods will decrease and Chinas demand for Us goods may increase.

]]> By: Charlie Carrick http://welkerswikinomics.com/blog/2009/10/26/exchange-rates-currency-manipulations-and-the-balance-of-trade/comment-page-1/#comment-8746 Charlie Carrick Tue, 27 Oct 2009 07:00:07 +0000 http://welkerswikinomics.com/blog/2008/11/14/exchange-rates-currency-manipulations-and-the-balance-of-trade/#comment-8746 I think that China has focused on the short run and is maintaining the number of exports. I think that in the long run, however, there could be disadvantages as the importers do not have foreign producers willing to sell their goods. This is actually good for the Chinese economy as the importers are now forced to purchase local goods, providing revenue for their industries. Keeping the currency at a low value will steadily increase their growth as an economy and this is what they need to become a more developed country. This does not benefit the USA as much because the lower Chinese prices crowd out the local industries in the states. I think that China has focused on the short run and is maintaining the number of exports. I think that in the long run, however, there could be disadvantages as the importers do not have foreign producers willing to sell their goods. This is actually good for the Chinese economy as the importers are now forced to purchase local goods, providing revenue for their industries. Keeping the currency at a low value will steadily increase their growth as an economy and this is what they need to become a more developed country. This does not benefit the USA as much because the lower Chinese prices crowd out the local industries in the states.

]]> By: Yesuel http://welkerswikinomics.com/blog/2009/10/26/exchange-rates-currency-manipulations-and-the-balance-of-trade/comment-page-1/#comment-8745 Yesuel Tue, 27 Oct 2009 06:58:28 +0000 http://welkerswikinomics.com/blog/2008/11/14/exchange-rates-currency-manipulations-and-the-balance-of-trade/#comment-8745 This chinese idea of domestic protection is exmtreme. The United states of America is the huge china's importer, which takes over 40percentages of Whole export products. However, the major fact of increase of chinese exchage rate is the economic recession the us facing therefore, even china reduces the price of exports it wouldnt make much difference. This chinese idea of domestic protection is exmtreme. The United states of America is the huge china’s importer, which takes over 40percentages of Whole export products. However, the major fact of increase of chinese exchage rate is the economic recession the us facing therefore, even china reduces the price of exports it wouldnt make much difference.

]]> By: Rocio Perez http://welkerswikinomics.com/blog/2009/10/26/exchange-rates-currency-manipulations-and-the-balance-of-trade/comment-page-1/#comment-8712 Rocio Perez Mon, 26 Oct 2009 19:55:50 +0000 http://welkerswikinomics.com/blog/2008/11/14/exchange-rates-currency-manipulations-and-the-balance-of-trade/#comment-8712 A weak RMB makes China an attractive country to trade with, particularly the production of goods, which presents competition to developing countries. By keeping the RMB low, China is able to maintain a the sector of exported manufactured production strong. One of the protectionist measures the Obama administration could (and has) taken is putting a tariff on Chinese goods to decrease its Chinese exports and help fuel the domestic manufacturing sector. Although like we learned in the last unit, this could cause even bigger problems in terms of America's and China's GDP. Wouldn't it be in everyone's best interest that the US redirects its training to focus on the financing sector instead of setting too many protectionist regulations on Chinese exports? I thought a depreciated RMB was good for the trade agreement between the US and China.. A weak RMB makes China an attractive country to trade with, particularly the production of goods, which presents competition to developing countries. By keeping the RMB low, China is able to maintain a the sector of exported manufactured production strong.

One of the protectionist measures the Obama administration could (and has) taken is putting a tariff on Chinese goods to decrease its Chinese exports and help fuel the domestic manufacturing sector. Although like we learned in the last unit, this could cause even bigger problems in terms of America’s and China’s GDP. Wouldn’t it be in everyone’s best interest that the US redirects its training to focus on the financing sector instead of setting too many protectionist regulations on Chinese exports? I thought a depreciated RMB was good for the trade agreement between the US and China..

]]> By: Christian Evertz http://welkerswikinomics.com/blog/2009/10/26/exchange-rates-currency-manipulations-and-the-balance-of-trade/comment-page-1/#comment-8707 Christian Evertz Mon, 26 Oct 2009 19:22:46 +0000 http://welkerswikinomics.com/blog/2008/11/14/exchange-rates-currency-manipulations-and-the-balance-of-trade/#comment-8707 1. How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners? Since the Chinese RMB is weak compared to a currency like the US dollar, it is much cheaper to produce things in China than in the US. This gives the Chinese manufacturing industries a competitive advantage over e.g. American industries.Consumers of China's largest trading partners woud rather buy cheap Chinese exports than more expensive domestic products. This of course leads to an increase in the domestic unemployment rate since domestic producers are forced to cut costs due to the weak demand for their products. The increase in unemployment wich leads to a decreases in spending in the economy combined with the increase in imports could lead to a fall in the nations aggregate demand curve causing even more unemployment and a decrease in GDP. 2. What is China’s purpose for maintaining the low value of the RMB relative to the currencies of other nations? By having a low vaue currency, China's goal is to increase its exports given the fact that other nations with a stronger currency would by Chinese products because they are cheaper for them to buy. An increase in exports could cause China's aggregate demand curve to shift out leading to an increase in GDP and employment and potentially to economic growth if the long run aggregate supply curve shifts out as well. China, because it has such a high population, is dependent on economic growth and thus needs to adopt methods such as keeping its currency low in order to fuel economic growth. 1. How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?

Since the Chinese RMB is weak compared to a currency like the US dollar, it is much cheaper to produce things in China than in the US. This gives the Chinese manufacturing industries a competitive advantage over e.g. American industries.Consumers of China’s largest trading partners woud rather buy cheap Chinese exports than more expensive domestic products. This of course leads to an increase in the domestic unemployment rate since domestic producers are forced to cut costs due to the weak demand for their products. The increase in unemployment wich leads to a decreases in spending in the economy combined with the increase in imports could lead to a fall in the nations aggregate demand curve causing even more unemployment and a decrease in GDP.

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

By having a low vaue currency, China’s goal is to increase its exports given the fact that other nations with a stronger currency would by Chinese products because they are cheaper for them to buy. An increase in exports could cause China’s aggregate demand curve to shift out leading to an increase in GDP and employment and potentially to economic growth if the long run aggregate supply curve shifts out as well. China, because it has such a high population, is dependent on economic growth and thus needs to adopt methods such as keeping its currency low in order to fuel economic growth.

]]> By: Pia http://welkerswikinomics.com/blog/2009/10/26/exchange-rates-currency-manipulations-and-the-balance-of-trade/comment-page-1/#comment-7200 Pia Tue, 16 Dec 2008 21:53:59 +0000 http://welkerswikinomics.com/blog/2008/11/14/exchange-rates-currency-manipulations-and-the-balance-of-trade/#comment-7200 Myrthe is making a really important point, because how is China able to keep its exchange rate of the RMB so low? It has to do with the different exchange rate systems. On the one hand, the US has a floating exchange rate, meaning that the value of the dollar is allowed to be determined solely by the demand for, and supply of, the dollar on the foreign exchange market - there is no government intervention to influence the value of the dollar. China, othe other hand, has a managed exchange rate, meaning that China is able to regulate the RMB through government intervention. Thus China decided to lower the exchange rate of the RMB in order to make chinese goods more attractive to foreign consumers such as US consumers. Hence there is a high demand of chinese exports because as the RMB depreciates, chinese goods and services are cheaper relative to expensive American goods. Myrthe is making a really important point, because how is China able to keep its exchange rate of the RMB so low?

It has to do with the different exchange rate systems. On the one hand, the US has a floating exchange rate, meaning that the value of the dollar is allowed to be determined solely by the demand for, and supply of, the dollar on the foreign exchange market – there is no government intervention to influence the value of the dollar.
China, othe other hand, has a managed exchange rate, meaning that China is able to regulate the RMB through government intervention. Thus China decided to lower the exchange rate of the RMB in order to make chinese goods more attractive to foreign consumers such as US consumers. Hence there is a high demand of chinese exports because as the RMB depreciates, chinese goods and services are cheaper relative to expensive American goods.

]]> By: Myrthe van Vliet http://welkerswikinomics.com/blog/2009/10/26/exchange-rates-currency-manipulations-and-the-balance-of-trade/comment-page-1/#comment-7180 Myrthe van Vliet Tue, 16 Dec 2008 18:48:21 +0000 http://welkerswikinomics.com/blog/2008/11/14/exchange-rates-currency-manipulations-and-the-balance-of-trade/#comment-7180 I'm wondering how China, politically is able to keep the exchange rate for the RMB this low? Wouldn’t it make sense for the WTO to have done something about it by now? I realize that it is a form of protectionism, but it has drastically harmed other economies (the US) keeping the RMB this low seems unfair to me. I’m wondering how China, politically is able to keep the exchange rate for the RMB this low? Wouldn’t it make sense for the WTO to have done something about it by now? I realize that it is a form of protectionism, but it has drastically harmed other economies (the US) keeping the RMB this low seems unfair to me.

]]> By: Nic http://welkerswikinomics.com/blog/2009/10/26/exchange-rates-currency-manipulations-and-the-balance-of-trade/comment-page-1/#comment-7121 Nic Wed, 10 Dec 2008 17:03:46 +0000 http://welkerswikinomics.com/blog/2008/11/14/exchange-rates-currency-manipulations-and-the-balance-of-trade/#comment-7121 'This threat to the exports of china’s competitors causes a significant fall in exports, and thus a fall in GDP and aggregate demand. In times of recession, as in the US right now, this poses a great potential problem, as it could worsen the recession.' I happen to agree here with what Palmi says here, and it seems as though (as stated in the article) protectionism is one of the only ways to protect the domestic industry, which could increase domestic employment. The employment stability could also put confidence back into the consumers to spend more money (because consumers with a stable job will tend to spend more of their income). As the article states: "It is noteworthy that President-elect Obama has actively and repeatedly supported action against 'currency manipulation.'" In addition, economists claim that the government will need to increase expenditure to get out of the recession. This money could be put towards creating more jobs, and trying to develop more efficient industries (and not on irrational bailouts, but that's not the point). Sebastian said that: "Obama does not only fight the cheap RMB compared to the US$, but raise the prices of the imports and with that the real income of the average US citizen decreases as they mostly depend on these imports." Hopefully Sebastian, the US will become less independent if they can create efficient, long lasting, successful industries. Does this not sound advantageous to the US? ‘This threat to the exports of china’s competitors causes a significant fall in exports, and thus a fall in GDP and aggregate demand. In times of recession, as in the US right now, this poses a great potential problem, as it could worsen the recession.’

I happen to agree here with what Palmi says here, and it seems as though (as stated in the article) protectionism is one of the only ways to protect the domestic industry, which could increase domestic employment. The employment stability could also put confidence back into the consumers to spend more money (because consumers with a stable job will tend to spend more of their income). As the article states: “It is noteworthy that President-elect Obama has actively and repeatedly supported action against ‘currency manipulation.’” In addition, economists claim that the government will need to increase expenditure to get out of the recession. This money could be put towards creating more jobs, and trying to develop more efficient industries (and not on irrational bailouts, but that’s not the point).

Sebastian said that: “Obama does not only fight the cheap RMB compared to the US$, but raise the prices of the imports and with that the real income of the average US citizen decreases as they mostly depend on these imports.” Hopefully Sebastian, the US will become less independent if they can create efficient, long lasting, successful industries.

Does this not sound advantageous to the US?

]]> By: Matteo http://welkerswikinomics.com/blog/2009/10/26/exchange-rates-currency-manipulations-and-the-balance-of-trade/comment-page-1/#comment-6781 Matteo Thu, 20 Nov 2008 23:49:37 +0000 http://welkerswikinomics.com/blog/2008/11/14/exchange-rates-currency-manipulations-and-the-balance-of-trade/#comment-6781 How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners? The policy of China is a combination of low cost of labour, its main competitive advantage, and exchange rate. Leveraging on low salaries and wages China has become the "world factory" for a huge variety of products with a low content of technology and know-how. Export consumers prefer chinese products simply because they are cheap. This poses a threat to the economies of the trading partners, as chinese exports increase and as well as the import of the traing partnrs, with opposite results: China boosts its exports, increases steadily its trade surplus and keeps rising current account surplus. The trading economies suffer from an increasing trade deficits and reduce their current accounts. On the other hand China is placing barriers with tariffs to imports of prducts with high content of technology to defend domestic emplpyment and the industries whose size and economy of scale is not comparable to that of western countries (like in the automotive sector). How does China continuing to undervalue its currency threaten the industrial economies of its largest trading partners?

The policy of China is a combination of low cost of labour, its main competitive advantage, and exchange rate. Leveraging on low salaries and wages China has become the “world factory” for a huge variety of products with a low content of technology and know-how. Export consumers prefer chinese products simply because they are cheap. This poses a threat to the economies of the trading partners, as chinese exports increase and as well as the import of the traing partnrs, with opposite results: China boosts its exports, increases steadily its trade surplus and keeps rising current account surplus. The trading economies suffer from an increasing trade deficits and reduce their current accounts. On the other hand China is placing barriers with tariffs to imports of prducts with high content of technology to defend domestic emplpyment and the industries whose size and economy of scale is not comparable to that of western countries (like in the automotive sector).

]]> By: Sebastian S http://welkerswikinomics.com/blog/2009/10/26/exchange-rates-currency-manipulations-and-the-balance-of-trade/comment-page-1/#comment-6780 Sebastian S Thu, 20 Nov 2008 23:37:02 +0000 http://welkerswikinomics.com/blog/2008/11/14/exchange-rates-currency-manipulations-and-the-balance-of-trade/#comment-6780 That is exactly the problem if Obama protects the US economy from the cheap Chinese imports. He does not only fight the cheap RMB compared to the US$, but raise the prices of the imports and with that the real income of the average US citizen decreases as they mostly depend on these import. With this dependency that China has the advantage in trade. So with the artificial low currency China is in a way dumping its goods in the US and destroying the local economy which creates a dependency on Chinese goods. So the real problem in my opinion that the US is facing is dumping which resulted from the artificial weak currency. That is exactly the problem if Obama protects the US economy from the cheap Chinese imports. He does not only fight the cheap RMB compared to the US$, but raise the prices of the imports and with that the real income of the average US citizen decreases as they mostly depend on these import. With this dependency that China has the advantage in trade. So with the artificial low currency China is in a way dumping its goods in the US and destroying the local economy which creates a dependency on Chinese goods. So the real problem in my opinion that the US is facing is dumping which resulted from the artificial weak currency.

]]> By: Elisabeth Spielbichler http://welkerswikinomics.com/blog/2009/10/26/exchange-rates-currency-manipulations-and-the-balance-of-trade/comment-page-1/#comment-6773 Elisabeth Spielbichler Thu, 20 Nov 2008 20:57:30 +0000 http://welkerswikinomics.com/blog/2008/11/14/exchange-rates-currency-manipulations-and-the-balance-of-trade/#comment-6773 I mean there are benefits to China lowering their value of their currency. However, are there no disadvantages in the long run? If the exchange rate is in danger of falling, then the government will have to raise the interest rate in order to increase the demand for the currency - however, this will have deflationary effect on the economy, lowering demand and increasing unemployment. This means that the domestic macroeconomic goal (low unemployment) may have to be sacrificed. Also, if the exchange rate is set at the wrong level, then export firms may find that they are not competitive in foreign markets. If China sets artificially low exchange rates level, then that may cause international disagreements. That is because a low exchange rate will make a country's exports more competitive on world markets and may be seen as an unfair trade advantage. Are there chances of this happening to China? I mean there are benefits to China lowering their value of their currency. However, are there no disadvantages in the long run?
If the exchange rate is in danger of falling, then the government will have to raise the interest rate in order to increase the demand for the currency – however, this will have deflationary effect on the economy, lowering demand and increasing unemployment. This means that the domestic macroeconomic goal (low unemployment) may have to be sacrificed.
Also, if the exchange rate is set at the wrong level, then export firms may find that they are not competitive in foreign markets.
If China sets artificially low exchange rates level, then that may cause international disagreements. That is because a low exchange rate will make a country’s exports more competitive on world markets and may be seen as an unfair trade advantage.
Are there chances of this happening to China?

]]> By: Magdalena http://welkerswikinomics.com/blog/2009/10/26/exchange-rates-currency-manipulations-and-the-balance-of-trade/comment-page-1/#comment-6769 Magdalena Thu, 20 Nov 2008 19:33:13 +0000 http://welkerswikinomics.com/blog/2008/11/14/exchange-rates-currency-manipulations-and-the-balance-of-trade/#comment-6769 China is using protectionism to protect its currency, RMB, by keeping it where the government want it to be, low, as Robin said. If China would not chose to do that, it would affect their whole economy because as their currency would get a lower value, their prices on goods and services would have to increase and foreign consumers would therefor face a higer price and would chose to buy their goods and services elsewhere, and China would lose a lot of their exports and consumers. (What China does to keep its currency where they want it is to keep as many of their dollars as possible, which is a good thing for the US right now aswell since if China would let go of their dollars, the dollar value would lose even more in value.) China is using protectionism to protect its currency, RMB, by keeping it where the government want it to be, low, as Robin said.
If China would not chose to do that, it would affect their whole economy because as their currency would get a lower value, their prices on goods and services would have to increase and foreign consumers would therefor face a higer price and would chose to buy their goods and services elsewhere, and China would lose a lot of their exports and consumers.
(What China does to keep its currency where they want it is to keep as many of their dollars as possible, which is a good thing for the US right now aswell since if China would let go of their dollars, the dollar value would lose even more in value.)

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