To say that this issue has been a contentious one would be making the understatement of the year. The debate goes like this: The United States, under the Bush Administration, contends that China is unfairly manipulating its currency to keep it at the 8.3 it’s been for the better part of a decade, basically floating against the dollar. China, on the other hand, denies any wrong doing, and maintains that the floating exchange rate is necessary for maintaining economic growth. This is not the first time there has been a trade issue between the U.S. and China; in fact, very recently, U.S. software manufacturers shot some rounds of ammunition at the Chinese government for not doing enough to curtail an apparent software piracy problem. Many manufacturers have been citing the low wages paid to its factory workers as an unfair competitive advantage. Despite all this, the main point of the contention is about the non-existant fluctuation of China’s yuan currency, and its affect on the major trade deficit the United States currently has with China.
Here’s a little explanation of the issue. Manufacturing jobs have been leaving the U.S. at a large clip, leaving many people stateside holding pink slips instead of whatever device they were using to perform their jobs. This has led to much finger pointing towards the east, since many companies have moved their operations to the other side of the Pacific towards lower costs and, ultimately a higher profit margin. In fact, many Chinese factory workers make about six dollars a day compared to the United State’s minimum wage in many states of about seven dollars an hour.
Increasing the tension is the trade surplus China holds in the United States. As of the time of writing, the number was at over one hundred billion dollars. Many claim that it is because of China’s relatively cheap yuan that allows Chinese exporters to undercut the prices of its competitors, many being domestic to the United States. Many analysts have stated that if the yuan were allowed to move freely according to the market, it would jump by ten and forty percent. And it is thought that a jump in the exchange rate may allow for a more level playing field.
Although pressure from the United States and other countries has been issued, China has offered solutions, but has stopped short of touching the exchange rate issue. China has been making huge purchases of U.S. Treasury Securities; in fact one estimate has the dollar figure at forty-one billion for the first half of this year alone, far more than any other country except Japan. Another plan is to curtail export subsidies that give may give its industries more of a competitive advantage. Furthermore, China says that a lower yuan actually helps the world economy. Officials from Beijing have stated that it helps fuel China’s economic growth, which will allow it to purchase more from other countries around the world. Analysts have even said that while China has a surplus in the United States, it is at a deficit with many other countries.
Despite these concessions, the Bush Administration, along with United States manufacturers, especially those in the textile industry, are pushing for retaliatory measures. Quotas on Chinese lingerie is one such recent example. The current president is certainly no stranger to trade barriers, having enacted a tariff on imported steel in the recent past.
China is in the midst of an economic boom, especially in the real estate arena. Millions of jobs are being created, it has been said, to compensate for those lost in the changeover from Communism to a free market system. It has also been said that Chinese banks may be poorly equipped to handle a fluctuation in the exchange rate. There has been much lobbying to keep the rate where it is for this reason. Nearly one out of every three loans is said to be left unpaid. Further, according to Larry Lang, chairman of the department of finance at the Chinese University of Hong Kong, the debate is all about politics and that, “The U.S. simply cannot have manufacturing. It's not the American comparative advantage.” Many have even seen this as an attempt from the Bush Administration to appease domestic manufacturers as elections close in.
Whether the truth is that it is simply politicking on the United States’ behalf, or China has been wrongfully manipulating its currency to jockey for the prime competitive position, the fact remains that this debate is far from over. Will we ever see a more substantial concession from the Chinese? And if we do, will it mean the return of lost jobs to the United States? How will China’s banks handle the change? There are a multitude of questions that lead the way to a blurry economic future.
Works Cited:
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Peter S. Goodman. The Washington Post. Washington, D.C.: Sep 1, 2003. pg.
A.01
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Phillip Day. Wall Street Journal. (Eastern edition).New York, N.Y.: Sep 17, 2003.
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Edmund L. Andrews. New York Times. (Late Edition (East Coast)).New York,
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Wall Street Journal. (Eastern edition).New York, N.Y.: Sep 23, 2003. pg. A.24
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Chinese goods. But importers say that won't save jobs.:[HOME EDITION]”
Evelyn Iritani. Los Angeles Times. Los Angeles, Calif.: Nov 4, 2003. pg. C.1
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