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Us-China Exchange Rate

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Us-China Exchange Rate
1.0 INTRODUCTION

The objective of the report is to analyze the trade relationship between US and China as the issue regarding US blaming China’s undervalued currency arise due to US which incur trade deficit. In addition, the report would like to examine the factors that lead into the US-China trading problems.

Therefore, first section in the report discusses the background of US-China trading. The next section explains the dynamics of exchange rate mechanism works and how it set upon. Then, fourth section elaborates the factors that lead to distortions in trade between two countries due to unfair trade. The fifth section clarifies about China’s exchange rate policy and its impact on the global financial and economic market while subsequent section analyze about the factors behind the trade deficit with China. Lastly, the section examines the measures that can be taken by international financial bodies in ensuring the exchange rate mechanism works.

2.0 BACKGROUND OF US-CHINA TRADING

US-China trade rose rapidly after the two nations established diplomatic relations in January 1979, signed a bilateral trade agreement on July 1979, and provided mutual most favoured-nation (MFN) treatment beginning in 1980. Total trade (exports plus imports) between the two nations rose from about $5 billion in 1980 to $366 billion in 2009 (Table 1); China is now the third-largest US trading partner. Over the past few years, US trade with China has grown at a faster pace than that of any other major US trading partner (Morrison, W.M., 2005). Throughout the years, even their trading keep continuing, both countries faced difficulties in managing their trading relations. Therefore, it is crucial to analyze how the exchange rate mechanism influenced US-China trading as they involve foreign market.

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The above table describe the relationship between China and US trading. As we can see, the total of US exports and imports are keep increasing


References: Elwell, C. K. (2008). The U.S. Trade Deficit: Causes, Consequences, and Cures. . Congressional Research Service. Foreign Exchange Rates. Retrieved August, 11, 2010, from http://www.thismatter.com/money/forex/foreign_exchange_rates.htm. Goldstein, M., & Lardy, N. (2007, October). China’s Exchange Rate Policy: An Overview of Some Key Issues. Peterson Institute for International Economics. Goldstein, M. (2004, May). Adjusting China’s Exchange Rate Policies. Institute for International Economics, China. Lardy, N. R. (2005). Exchange Rate and Monetary Policy in China. Cato Journal, 25. Lum, T., & Nanto, D. K. (2007). China’s Trade with the United States and the world. Congressional Research Service. Morrison, W. M., & Labonte, M. (2008). China’s Currency: Economic Issues and Options for U.S. Trade Policy. Congressional Research Service. Morrison, W. M. (2005). China-U.S. Trade Issues. Congressional Research Service. Morrison, W. M. (2010). China-U.S. Trade Issues. Congressional Research Service. Muller-Plantenberg, N. A. (2008). Balance of payments accounting and exchange rate dynamics. Retrieved from http://www.mullerpl.net/econ/p/0038/bop_fx.pdf. The People’s Bank of China. (2008). Annual Report 2008. Retrieved from http://www.pbc.gov.cn/english/chubanwu/nianbao/2008.asp. APPENDIX Table A1: US Merchandise Trade with China and China’ Merchandise Trade with the United States, 1984-2005 (millions of dollars) Figure 1: How Supply and Demand Set Currency Exchange Rates Figure 3: Saving by Region as a Percentage of GDP, 2004 Table 8: Today’s Exchange Rates, Tuesday, August 17, 2010 Japan
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