China's Exchange Rate Peg: Economic Issues and Options for U.S. Trade Policy
Abstract
The continued rise in the U.S.-China trade imbalance and complaints from U.S. manufacturing firms and workers over the competitive challenges posed by cheap Chinese imports have led several Members to call for a more aggressive U.S. stance against certain Chinese trade policies they deem to be unfair, such as China's policy of pegging its currency (the yuan) to the U.S. dollar. Some Members assert this policy constitutes a form of currency manipulation intended to give China an unfair trade advantage and is contributing to the loss of U.S. manufacturing jobs. If the yuan is undervalued against the dollar, there are likely to be both benefits and costs to the U.S. economy. It would mean that imported Chinese goods are cheaper than they would be if the yuan were market determined. This lowers prices for U.S. consumers and diminishes inflationary pressures. It also lowers prices for U.S. firms that use imported inputs (such as parts) in their production, making such firms more competitive. When the U.S. runs a trade deficit with the Chinese, this requires a capital inflow from China to the United States. This, in turn, lowers U.S. interest rates and increases U.S. investment spending. On the negative side, lower priced goods from China may hurt U.S. industries that compete with those products, diminishing their production and employment. In addition, an undervalued yuan makes U.S. exports to China more expensive, thus diminishing the level of U.S. exports to China and job opportunities for U.S. workers in those sectors. However, in the long run, trade can affect only the composition of employment, not its overall level. Thus, inducing China to appreciate its currency would likely benefit some U.S. economic sectors, but would harm others, including U.S. consumers. Critics of China's peg point to the large and growing U.S. trade deficit with China as evidence that the yuan is undervalued and harmful to the U.S. economy.
Document Details
- Document Type
- Technical Report
- Publication Date
- May 10, 2005
- Accession Number
- ADA462512
Entities
People
- Marc Labonte
- Wayne Morrison
Organizations
- Library of Congress