1. Why is China trying to hold down the value of the yuan? What evidence suggests that China is indeed pursuing a weak currency policy?
2. What benefits does China expect to realize from a weak currency policy?
3. Other things being equal, what would a 27.5% tariff cost American consumers annually on $200 billion in imports from China?
4. Currently, imports from China account for about 10% of total U.S. imports. A 25% appreciation of the yuan would be the equivalent of what percent dollar depreciation? How significant would such a depreciation likely be in terms of stemming America’s appetite for foreign goods?
5. What policy tool is China using to maintain the yuan at an artificially low level? Are there any potential problems with using this policy tool? What might China do to counter these problems?
6. Does an undervalued yuan impose any costs on the Chinese economy? If so, what are they?
7. Suppose the Chinese government were to cease its foreign exchange market intervention and the yuan climbed to five to the dollar. What would be the percentage gain to investors who measure their returns in dollars?
8. Currently, the yuan is not a convertible currency, meaning that Chinese individuals are not permitted to exchange their yuan for dollars to invest abroad. Moreover, companies operating in China must convert all their foreign exchange earnings into yuan. Suppose China were to relax these currency controls and restraints on capital outflows. What would happen to the pressure on the yuan to revalue? Explain.
9. In 2011, six years later, the U.S. Senate was again considering a bill that would punish China for suppressing the value of its currency to give its exports a competitive advantage. Why have both the Bush and Obama administrations, one Republican and the other Democratic, resisted such legislation?
On April 6, 2005, the U.S. Senate voted 67 to 33 to impose a 27.5% tariff on all Chinese products entering the United States if Beijing did not agree to revalue the yuan by a like amount. Almost two years earlier, on September 2, 2003, U.S. Treasury Secretary John Snow had traveled to Beijing to lobby his Chinese counterparts to revalue what was then and still is widely regarded as an undervalued yuan. In the eyes of U.S. manufacturers and labor unions, a cheap yuan gives China’s exports an unfair price advantage over competing American products in the world market and is part of a mercantilist strategy designed to favor Chinese industry at the expense of foreign competitors. A consequence of this strategy is an accelerating movement of manufacturing jobs to China. One piece of evidence of this problem was the widening U.S. trade deficit with China, which reached $162 billion in 2004 (on about $200 billion in total imports from China). Similarly, Japan, South Korea, and many European and other nations were pushing for China to abandon its fixed exchange rate because a weak U.S. dollar, which automatically lowered the yuan against other currencies, was making already inexpensive Chinese goods unfairly cheap on global markets, hurting their own exports.
1 Why is China trying to hold down the value