United States-China Trade Relations and the Chinese Yuan

Of all the trade relationships, the United States trade relationship with China is one of the most unique. Through the context of globalization, the United States and China have become increasingly interdependent on one another. The United States is far and away the largest importer of Chinese goods, more than Japan, South Korea, and Germany combined. Also of interest, and not as well known, China has increasingly boosted their quantity of U.S. imports. Over a decade ago, China was the 13th largest export market, now it ranks 4th.

What can we attribute this to? Certainly with the rise of the Chinese middle class, the demand for quality American goods has risen. Additionally, globalization has spread over the past couple decades and penetrated deep into societies.

Before getting into some of the trade inequalities that exists, let's give credit where credit is due shall we? The flood of Chinese imports (quality issues aside) has resulted in cheaper products for U.S. consumers and helped keep inflation in check. Secondly, U.S. investments in China consistently perform better than the global average. Also of note, and of particular interest to this blogger, American businesses in China have been generally successful, also performing better than the global average.

Despite these positives and despite the increase in U.S. exports to China, the trade balance between the two countries is still skewed towards China. Many economists, particularly in the United States attribute this to the Yuan/Dollar exchange rate. The Chinese Yuan is a "floating" currency which is pegged to the United States dollar and is closely monitored and some might say manipulated. The result? A currency that is worth much less than it should be. The Chinese Yuan is worth much less that purchasing power parity would suggest. This results in Chinese exports being much more competitive and makes U.S. imports less attractive. It is no wonder that U.S. officials (and the World Bank) have called on China to re-evaluate their currency! Still, much depends on the eye of the beholder. Americans living in China and those conducting business likely favor the status quo. It is the American manufacturer who is most at odds. Facing a substantial decline in domestic production, this only further complicates matters for those exporting to China.