China recently announced it will strengthen its currency and allow it to move more freely against the American dollar, something the United States has been pressuring it to do for years to decrease trade imbalances. While it might be hard on consumers at first, a currency change could offer American companies the opportunity to gain a competitive edge.
An adjustment of exchange rates recognizes China's phenomenal growth in the last 20 years. Even in the recession, China's economy has fared much better than the West's. In the last year, it has experienced a 46 percent increase in exports and a 45 percent increase in imports.
Now, China faces rapidly increasing inflation. Strengthening the renminbi, the Chinese currency, can help fix that. A stronger currency will contribute to lower prices by decreasing the cost of imports and should allow the central bank to raise interest rates.
As U.S. imports become cheaper for the Chinese, their goods will become more expensive for Americans. This will allow American producers to be more competitive, but will make goods more expensive for U.S. consumers.
America hopes export competitiveness will lead to job growth, especially in manufacturing, where jobs have been declining for decades.
The effect depends on how much China's currency moves. China strengthened its currency around 2 percent in 2005, yet still experienced a $115 billion trade surplus with the U.S. A much larger change is needed because the Chinese currency is estimated to be undervalued by 25 percent to 40 percent.
Currency change is just one factor in the U.S.-China trade imbalance. Trade will take years to adjust.
Even if the change is big enough, American companies will need to work hard to become competitive, and must not rely solely on the aid of a devalued dollar.
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