US and China trade war effects on currency

Trade War between U.S. And China on Currency

Over the last several years, the issue of the trade between the U.S. And China has been increasingly brought to the forefront. The main reason for this is because the reforms that have taken place, are allowing China to quickly become a major economic power. As they have became the largest exporter, who is holding tremendous amounts of currency reserves and foreign debt. This is important, because the large account surplus that is being experienced has cause some nations (i.e. The United States and the European Union) to accuse China of engaging a new form of mercantilism at their expense. This is when the different nations will compete with one another, with the intention of creating large current account surpluses, by unfairly flooding trading partners with cheap imports. If left unchecked, this has the ability to create vast inequalities in the global economy, as key areas are deprived of wealth.

As a result, the artificial peg on the Chinese currency (the yuan) has become a source of major contention. This is because, the yuan has become significantly undervalued (due the peg that is in place), making Chinese imports much cheaper in foreign markets. At the heart of the issue, is the overall rate that the Chinese should let the currency appreciate, as many Western nations are calling for the peg to be completely removed. This (they argue) would help to address the obvious trade imbalances that are taking place. While on the other hand, the Chinese believe that they should take gradual steps towards revaluation. This is because they feel that drastic moves, to the currency could have an impact on: unemployment and economic growth. At which point, relations between these nations and China have become increasingly strained.

This is heart of the potential trade war, as the overall rate of currency revaluations, could spark heated emotions and animosity.

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The growth of China in the world market first began in the late 1970's and involved shifting, the allocation of various resources away from the government to private entities. This was part of a larger plan to modernize China and bring the nation into the developed world. Over the course of time, this policy would mean that certain actions would need to be in place, to help China experience continued economic growth (the pegging of their currency against the dollar). This would allow the country to have an advantage of importing cheaper manufactured goods into the United States. As various trade barriers and restrictions were reduced, to help facilitate increased amounts of commerce between the two nations. Over a period of several years, this allowed China to experience consistent trade surpluses, while the U.S. would have large trade deficits. This is problematic, because it would mean that U.S. was experiencing a loss of wealth and power (from the large trade deficits) at the expense of China.

To rectify this situation, many in the U.S. began to call for a loosening of the currency against the dollar peg. As they felt that the increase in fluctuation would allow, the market to address the natural imbalances that were occurring. Like what was state previously, the main reason for the peg to be in place was to help provide China, with consistent economic growth (by making certain that their currency will remain at a set rate). This has caused sharp divisions between the U.S. / world opinion and China, as a number of different countries believe that the current policy gives the yuan an unfair advantage on world markets.

As a result, fears are running high that a potential currency war could take place between the U.S. And China on an economic front. This is a similar situation that occurred during the Suez Crisis of 1956, as Britain was facing declining influence in the world. At which point, they would become involved in a military conflict (over the Suez Canal). While no military conflict will occur in this situation, the U.S. is facing similar challenges with China when it comes to the yuan (which increases the possibility of a currency war).

Since China, has been slow to respond to the changes, the U.S. has engaged in a policy of weakening the dollar to prevent spiraling deflation. This is problematic, because it is creating differences of opinions about the issue surrounding the yuan. As some countries (such as the EU) feel that this is causing the world is experiencing increased amount of inflation. Where, the obvious differences in how to tackle this underling problem are becoming more apparent.