The US-China Exchange Rate Stand-Off
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Case Code: ECON019 Case Length: 18 Pages Period: 2002-2007 Pub Date: 2007 Teaching Note: Not Available |
Price: Rs.300 Organization : - Industry : - Countries : China and USA Themes: Corporate Social Responsibility |
Abstract Case Intro 1 Case Intro 2 Excerpts
"You can not have free trade when your partner is cooking the currency."
- Donald Manzullo, US Congressman, on March 05, 2007.
"It needs both sides to take the principle of mutual respect to increase understanding and strengthen communication rather than resorting to pressure or threats."
- Qin Gang, Chinese Foreign Ministry spokesman, on March 29, 2007.
Introduction
On January 31, 2007, the Fair Currency Bill was introduced in the US Congress. The bill was introduced to allow US industry to seek relief from damage caused by "imports that benefit from a subsidy in the form of foreign exchange-rate misalignment." Even though the bill was not country-specific, it was primarily directed at China - a major trading partner of the US, and the country with which the US ran a huge trade deficit. The bill was referred to several committees including the House Ways and Means Committee, the House Financial Services Committee, and a sub-committee on Trade.
Though a majority of the bills that are introduced in the US Congress do not cross the first stage of deliberation and investigation, Senator Charles Schumer, a New York Democrat, and Senator Lindsey Graham, a South Carolina Republican - two leading supporters of the bill and bitter critics of China's currency policy - expected the Congress to pass the bill "veto proof" by the end of the year. The senators were sure that the final bill, that would be carefully crafted to abide by WTO rules, would force China to raise the value of the Yuan against the US Dollar. The bill was representative of the US stand that China's currency was grossly undervalued. The US government attributed the large trade deficit with China to the Chinese government's manipulation of its currency, which made Chinese exports "artificially attractive", thus giving it an unfair trade advantage. The US cited Article IV of International Monetary Fund's (IMF)8 Articles of agreement that stated that countries should "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments (BOP) adjustment or to gain an unfair competitive advantage over other members."10 The US press too had been largely critical of China's currency policy.
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.
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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