China's Exchange Rate Peg concerning
Trade Policy with U.S.
Overview of the Problem
The U.S. and China trade imbalance continue to be on the rise. U.S. manufacturing firms and workers voiced complaints over the competitive challenges posed by cheap Chinese imports. China's trade policy of pegging its currency, the yuan, to the U.S. dollar has enabled an unfair trade advantage according to the U.S. Some have gone as far as calling it "currency manipulation." The outcome has been loss of U.S. manufacturing jobs and a U.S. trade deficit (Labonte & Morrison, 2005).
Political Pressure
According to the Bush Administration, China's undervalued currency has contributed to America's record $16 billion trade deficit with China last year and is responsible for the loss of 3 million U.S. manufacturing jobs since 2000. The G-7 discussions addressed the issue, but opinions differed. China felt that linkage to the U.S. dollar was a necessity. Expressing that currency volatility could disrupt the nation's fragile banking system. The U.S. has placed political pressure on China by introducing bills to both the House and Senate to impose economic sanctions on China, if it does not move to a floating currency, such as 27.5 percent across-the-board tariffs on Chinese goods coming into the U.S. until the Chinese change it's currency regime (Fiscal Study, 2005). China, a major rapidly growing economy, has a per capita income of only about $1,000 per year and with financial, legal and regulatory systems in desperate need of reform. For China to obtain a developed economy status they will have to address how they peg the yuan (Labonte & Morrison, 2005).
China's Exchange Rate Peg
Chinese for ten years now have maintained a fixed exchange rate for their ...