The US-China Exchange Rate Stand-Off
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Case Details:
Case Code : ECON019
Case Length : 18 Pages
Period : 2002-2007
Pub Date : 2007
Teaching Note :Not Available
Organization : -
Industry : -
Countries : China and USA
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Introduction Contd...
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Criticism of China's currency policy grew after
China's accession into the WTO, which allowed China's share of world
exports to grow from 4.4% in 2001 to more than 8% (2006), with a
significant portion of these exports reaching US shores. Post-WTO, the
US government had been using several means - including the threat of
trade sanctions - to pressurize China to revalue its currency against
the US Dollar. The Chinese government, on the other hand, maintained
that the exchange rate of the Yuan against the US Dollar was not fixed.
However, some Chinese officials agreed that their government did
intervene to maintain the exchange rate within a narrow band. But they
added that a stable Yuan-Dollar exchange rate was necessary as it
promoted economic and financial stability in China. |
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While US government and trade representatives were
critical of China's alleged pegging of the currency, economists were of the view
that undervaluation of the Yuan against the Dollar brought some benefits to the
US economy as well. The low prices of imported Chinese goods lowered the costs
for US firms that used these cheap Chinese imports as inputs in their
production. Also, the cheap Chinese imports helped keep inflation down in the
US.
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Background Note
The international monetary system, as we know it, has
been in existence since the 19th century. Prior to 1870, countries
adopted different monetary systems such as bimetallism, gold, silver,
and inconvertible fiat currencies. After 1870,11
many countries adopted gold convertibility.12
Gold was chosen because of its international recognition and its
characteristics such as divisibility into standardized units (ounces)
and storability. Most importantly, gold was thought to contribute to
economic stability. Under the gold standard, each currency was defined
in terms of its gold value. The US Dollar, which was unconvertible
earlier, became gold convertible in 1879... |
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