Respond to this students discussion post: By pegging the Yuan to the Dollar at a

Question

Respond to this students discussion post:

By pegging the Yuan to the Dollar at an undervalued exchange rate, the Chinese economy enjoys an advantage in trade with the United States. By having consistently lower valued currency, China can sell products to the United States cheaper than other countries which drives demand. On the other hand, goods from the United States are more expensive in China, lowering China's demand for U.S. manufactured products. This results in trade deficit mentioned above. Hilland and Devadoss (2013) state the following example, "As a result of the undervalued Yuan against the dollar, Brazil gains at the expense of the USA. A similar trend also holds for other commodities (cotton and wheat), where US competitors tend to displace US exports to China" (p. 247). The U.S. is hurt by this trade imbalance because it struggles to be competitive in the country with the largest populace in the world. This would also hold true in the reverse where Chinese imports to the U.S. are lower than those of other countries so Chinese goods are selected by U.S. importers over those of competing countries. Reference: Hilland, A., & Devadoss, S. (2013). Implications of Yuan/dollar exchange rate for trade. Journal of International Trade Law & Policy, 12(3), 243-257. Retrieved from http://search.proquest.com/docview/1428881984?accountid=28844

Explanation / Answer

In recent testimonies before the US Congress, scholars and representatives of the small business community have argued that China deliberately undervalues its currency, the Yuan, in order to gain a competitive advantage towards its major trading partners. China is being accused of manipulating the exchange rate by buying and selling Yuan on the international capital markets for a fixed price. Thereby it effectively discourages a free market value for the Yuan.

Whatever justifications are brought forward, first there must be a determination that the manipulated exchange rate is undervalued and, second, that as a result competition is unfair. Not surprisingly, Chinese monetary authorities have responded negatively to the allegation of manipulation. Like in any international dispute, the question is who should exercise authority and give binding judgment to the parties concerned.

In all cases in which the CONTRACTING PARTIES are called upon to consider or deal with problems concerning monetary reserves, balances of payments or foreign exchange arrangements, they shall consult fully with the International Monetary Fund. In such consultations, the CONTRACTING PARTIES shall accept all findings of statistical and other facts presented by the Fund relating to foreign exchange, monetary reserves and balances of payments, and shall accept the determination of the Fund as to whether action by a contracting party in exchange matters is in accordance with the Articles of Agreement of the International Monetary Fund, or with the terms of a special exchange agreement between that contracting party and the CONTRACTING PARTIES.

Consequently, the WTO must consult with the IMF on problems concerning foreign exchange arrangements and must accept facts presented by the IMF on foreign exchange and IMF determinations in exchange matters. IMF authority in this area cannot be challenged. IMF members have accepted that the IMF is the crux of the international monetary system and serves as "the center for the collection and exchange of information on monetary and financial problems."

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.