The article outlines some of the reasons behind the economic tension in trading relations between China and the U.S.A. Instead of devaluating its currency, China strives to maintain it at a low a value with respect to the dollar by buying and selling American bonds. With a low currency rate, Chinese exports are cheaper and more attractive to countries with a higher currency value. Consequently, U.S producers find it hard to face the competition.
Unlike China, the U.S emphasizes the creation of jobs to stimulate its economy rather than increase its exports. Furthermore, the current budget deficit and seigniorage make it hard for the U.S to devaluate its currency.
One possible solution for the U.S is to sell off reserves of its own currency and lower its value, as Switzerland and Japan did in the past to increase exports and stimulate their respective economy. Another solution is to improve the quality of produce, such as in Germany, where exports levels are high despite the high value of the European currency. The U.S is currently considering the taxation of Chinese imports unless they increase their currency value. However, such kind of protectionist policy will only increase the real exchange rate and it will also be detrimental to free trade and the global economy.
It will be very interesting to see how this situation plays out. I think that the U.S. really feels the need for China to stop devaluing their currency but it is tough to say whether the U.S. government would really impose tarriffs or quotas on our imports from China. We are extremely reliant on imports from China and imposing such taxes could damage the trade relations that we currently have with China. This really could be equally as damaging to the U.S. economy as the devaluing of their currency against the dollar is, depending on the extent of the damage that is done to our free trade relationship.
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