Abstract

The Yuan-Dollar exchange rate has been a sore point in US-China trade relations in the early to mid-2000s, with the US government asserting that the Yuan is undervalued and that this provides an unfair advantage in trade to China. The issue has been discussed in numerous economic, foreign relations, and international trade studies. While some analysts criticize China for not letting the Yuan appreciate against the US Dollar, others consider the low US savings rate to be the root cause of the US trade deficit with China. The case discusses the issue and attempts to analyze the impact of China’s currency policy on the economies of both countries.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Understand the dynamics of the exchange rate mechanism
• Understand the factors that can lead to distortions in trade between two countries
• Critically analyze China’s exchange rate policy
• and Analyze the factors behind the US trade deficit with China.

Keywords

Yuan-Dollar exchange rate, Undervalued currency and Chinese economy, US Trade Deficit, US-China trade relations, Effect of pegged Yuan on US economy, Misalignment of currencies, US treasury bills, International trade, US savings, China's Foreign exchange reserves