Magazine article Business Credit

Jobs, Exports and the Yuan: Pressure Builds on China for Currency Reform

Magazine article Business Credit

Jobs, Exports and the Yuan: Pressure Builds on China for Currency Reform

Article excerpt

Following two decades of economic liberalization, the World Trade Organization (WTO) accepted China into its ranks in 2001 and the country officially became a permanent member in 2006. But even before the country joined, China's GDP growth had been meteoric, and has remained so, peaking at 13% in 2007 before dropping to a still impressive 9% in 2008. In that same period, since late 2001, the U.S. has annually remained below 4% in terms of GDP growth.

China has had the population, the market and the demand to create this consistent growth and American exporters have tripped over themselves to take advantage of it. In 2001, U.S. exports to China totaled $19.2 billion. By 2008, that number had increased to $71.5 billion, and fell just a few percentage points in 2009 to $69.6 billion. China's high demand served as a sharp contrast to the evaporating demand and tightened spending of the U.S. during those years, and exporters rightly looked east to shore up what they may have lost domestically.

Now, however, the U.S. recession has ended and while some growth has returned, jobs continue to be elusive. It is for this reason that, from a public policy perspective, the primary goal is job creation. Nearly everything being proposed or considered on Capitol Hill at the moment is being couched in terms of what it will do for America's unpleasantly high unemployment rate, and this simple fact could have wide-ranging effects on the U.S., China and the unique trade relationship between the two.

Cause and Effect

Jobs in the U.S. have been lost for a great many number of reasons, the most notable of which is the recession, during which employers took an axe to their staffs and laid off who they could in order to remain lean and profitable. But while all these things were taking place--jobs being lost, American demand falling, U.S. exports to China increasing--imports and trade deficits were also increasing just as quickly. The 2009 amount of $69.6 billion in U.S. exports to China seems impressive, but becomes less so when paired with the $226.8 billion trade deficit the U.S. ran with China in the same period. In 2001, the deficit between the two nations was a comparatively tame $83 billion, then skyrocketed to just above $200 billion in 2005, peaking three years later at $266.3 billion in 2008. While more and more American goods and services were being shipped overseas, the U.S. was still importing a great number of things that, perhaps, could've been produced and purchased from companies within its own borders. The reasons for this have ruffled more than a few feathers in Congress.

Among the lawmakers dissatisfied with the nation's trade deficit, China has become an easy target both because the U.S. has its largest trade deficit with China, and because China has repeatedly been wont to enact vaguely nationalistic or protectionist policies. Nowhere is this latter sentiment more notable than when it comes to the matter of currency manipulation. "By unfairly manipulating their currency, the Chinese government has tilted the scales in their favor, and it's hurting Michigan businesses and costing us thousands of jobs," said Rep. Mark Schauer (D-MI), whose state has been hit particularly hard by deficits, in addition to the overall effects of the U.S. recession. "To help our workers and manufacturers compete on a level playing field, the administration needs to get tough with the Chinese and hold them accountable for unfairly manipulating their currency."

A number of different authorities believe that the Chinese yuan has been undervalued and hasn't been allowed to appreciate like some believe it should have. China opened its currency to a limited trade back in July 2005, which led the yuan to gain strength against the U.S. dollar, to which the yuan remains strictly pegged. The advent of the financial crisis in 2008, however, led the Chinese to restrict any further appreciation, or increase in the yuan's value, thereby making their goods cheaper to buy and undercutting goods produced in other countries with currencies that measure up stronger to the dollar. …

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