This activity will focus on globalization, international monetary system, and international trade (Course Objective # 4), currency values, global competition (Course Objective # 7), balance of trade (Course Objective # 8), national trade policy, political economy and competitive advantage. This assignment aligns with most of the Unit 5 learning objectives.

Directions

Notes:

The pressure on China to allow its currency to appreciate intensified recently in conjunction with the visit of China’s president, HuJintao, to the United States to meet with President Obama.  China, which has maintained an artificially low renminbi for some time, has resisted claims that its policies give Chinese exporters an unfair competitive advantage in the global market place.  While many countries have criticized China’s policies on its currency, the United States has been particularly vocal because of its large trade imbalance with the country.

The United States believes that China’s policy of keeping the renminbi at artificially low levels rather than allowing it to float according to market forces make Chinese products more attractive in foreign markets.  Moreover, U.S. Secretary of State Hillary Clinton argues that U.S. companies trying to export to China are at a disadvantage because of the country’s policies.  Clinton would like to see China open its markets to U.S. manufactured goods, farm and ranch products, and services.  According to Clinton, changes in China’s policy toward its currency would not only benefit the United States, but would also benefit the rest of the world by contributing to more balance and predictability in the global economy and broader prosperity.   U.S. Treasury Secretary Timothy Geithner has gone as far as to suggest that if China does not take steps to revalue its currency, it will in fact damage its relations with the rest of the world. 

China however, claims that its policies on the renminbi are simply part of a larger effort to discourage hot money in order to prevent its economy from overheating.  By prohibiting the open trading of its currency, China hopes to avoid increases in wages, raw materials prices, and property prices that could make its finished products more expensive in foreign markets. YashengHuang of the MIT Sloan School of Management defends China’s policies noting that even if China did allow its currency to rise, the U.S. would still continue to consume, and dollars would still flow out of the country.  U.S. consumption would simply be funded by another country such as India.   For now though, Secretary Geithner hopes to persuade China that as incomes continue to rise in China, so will the potential for inflation, which will ultimately push prices up, and make China’s goods less competitive.  Economist Gen Xiao believes that if this trend continues, the question of China revaluing its currency will be a moot point anyway because eventually inflation in China will converge with a stagnating economy in the United States and the issue will be resolved.

Watch this video: https://www.pinterest.com/pin/387591111650414147/ (opens in new window) OR use the embedded video link below.

Watch Video

User: n/a – Added: 1/18/11

YouTube URL: How Currency Choices ‘Made in China’ Have Big Impact on U.S. Economy

For your initial post, please choose 2 of the following Discussion Questions to answer. Include at least two outside sources to bolster your learning and understanding, (Note your sources):

1. Why was the value of China’s currency a dominant issue at the recent U.S. – China summit? Why is the United States pushing for a higher renminbi?  Why is China reluctant to allow its currency to appreciate?
2. Reflect on how policy decisions made in China affect the strategies of U.S. companies. What does this imply about the interdependency of the global monetary systems and economy in general? 
3. Discuss the claims by U.S. Secretary of State Hillary Clinton that policy reforms in China would contribute to global economic balance, predictability, and prosperity.  Do you agree with Clinton?  Why or why not?
4. How would inflation in China affect the competitiveness of its goods in global markets?