China Vs Usa

As we know there has been some recent controversy between China and the United states regarding the Chinese currency (Yuan). According to recent claims by the United states, the Chinese government has been using their currency to gain an unfair advantage over trade.
To state wether or not the United States government has a valid claim over this controversy, we must first understand how the Chinese government would be able to do this. The Chinese government, unlike many other major world economies has a managed economy. This means that though their economy tends to fluctuate, it is within the boundaries set up by the Chinese government. Meaning that if they decide that there needs to be deflation, they may “fix” the amount of international trading to make allow happen. In short they  allow revaluation and devaluation to happen at will

This issue would be fine, however obviously because all global economies are linked, a shift in one currency will deeply affect the value of another currency. By reevaluating or devaluating an economy at will it affects to a great extent the imports and exports of another country, and thus other nations industries. For example, if lets say an automobile manufacture is deeply dependent on Chinese goods to use as factors of production, if the Chinese industry reevaluates the currency (makes it worth more in terms of another currency, in this case the USD) it will affect the amount of automobiles produced. In this theoretical case it will decrease the amount of automobiles produced because the cost of the factors of productions has increased.

In reality however China has unfortunately devaluated the Yuan, causing major setbacks in domestic economies around the world. With the Yuan depreciating nations can buy foreign products for incredibly cheap prices. Thus allowing it much easier for Chinese industries to dump their products in the United States economy. To dump, (in economic terms) means to put in products in a foreign economy at a lower price than it will take for that economy to produce that product. In other words, lower than their cost of production.

If we observe the graph below, (figure 1) we can see the affects of this devaluation of Yuan will have on the price of the Yuan. The Yuan will cause a current account surplus on Chinese goods, and the flow of income. (Current Account Surplus is when there is more exports than imports). When a current account surplus happens, there will be an increase in the demand of Chinese Yuan. Thus increasing the quantity of the Yuan. However, the price of the Yuan will also happen. Shifting the Price from P1-P2. Demand of the Yuan is expected to increase from D1-D2, while the supply curve (the supply of Yuan) should stay the same.

Chinese Current Account Surplus

To state wether or not this is ethically correct or not is based purely on opinion. I partially agree with the claim that it is unfair because this will greatly affect the U.S governments aims to recover economically fully by the 2012 elections. However, I also support free trade to a very large extent. (Free trade is the ability to trade freely between nations without any trade barriers such as tariffs or quotas). By not allowing this to happen and complaining to the UN, the United States is being hypocritical. I think a reasonable solution would be to increase the tariffs on the imported Chinese goods for a while. (Tariffs are any taxes put on any imported foreign goods, usually per unit).