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Homework answers / question archive / 1) Which groups within the United States are most likely to be harmed by Chinese currency manipulation to lower the value of the renminbi? Why? Are there U

1) Which groups within the United States are most likely to be harmed by Chinese currency manipulation to lower the value of the renminbi? Why? Are there U

Sociology

1) Which groups within the United States are most likely to be harmed by Chinese currency manipulation to lower the value of the renminbi? Why? Are there U.S. groups that benefit when the renminbi is weaker relative to the dollar? 2. Why might China have decided at a certain point that changing course and propping up the value of its currency was in its economic interest? 3. When it comes to the role of international institutions, what are some arguments for their punishing currency manipulators? What are some arguments against their doing so?

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  1. An undervalued renminbi would have serious immediate and long-term consequences for the US economy. More specifically, it would harm American exporters (mostly in the manufacturing sector hoping to export successfully to China) and small and medium-sized enterprises (SMEs) who hope to compete with Chinese goods in third markets. This is because a cheaper renminbi essentially makes Chinese goods cheaper, thus making US exports less competitive and Chinese exports more competitive. With Chinese exports being relatively inexpensive, US exports and the production of US goods and services competing with Chinese imports will significantly fall thereby affecting manufacturing firms and SMEs who find that the cost of their raw materials and the cost of their final product are the same, leading to reduced trade revenues. Those domestic industries will also find it difficult to compete with cheaper and more affordable Chinese imports in the US market. On the other hand, a weaker renminbi compared to the dollar would benefit US consumers and firms that process parts and components made in China. Since it has cheaper exports, China gains a competitive advantage in the global market. Lowering the value of the renmibi also lowers the prices of already cheap Chinese products which US consumers rely on.
  2. If China decides to reverse its current course of action and instead, appreciate its currency, it is because the artificial manipulation of one's currency—and consequent devaluation—was found to be unsustainable for their economy. An undervalued renmibi is not just at the expense of the US, it will also eventually hurt China's already sluggish economy in the long run. Cheaper Chinese exports would create an export-oriented economic bubble which may lead to overdependence on the export industry, making China vulnerable to any global economic slowdown. Furthermore, China may stop undervaluing its currency because they would have realized that it makes imports drastically costlier, having 3 foreseeable impacts: an increase in inflation, nationals investing in other assets (i.e. US dollars), and negatively affected Chinese firms which import raw materials. A weaker renmibi generally creates greater pressure for the Chinese economy in the long-run and is against China's best interest.
  3. International institutions like the International Monetary Fund (IMF) and the World Trade Organization (WTO) exist to maintain the stability of the global economy and to facilitate international trade while ensuring that global trading rules and norms are not circumvented. China's devaluation of the renminbi, given that the country is the world's largest exporter and second-largest economy, not only impacts the US but also has rippling effects to the global economy. The IMF and the WTO are the two international institutions that more or less have jurisdiction over this issue of currency manipulation. The IMF can punish currency manipulators if it finds its members' exchange-rate policies to be unfair, though it has not yet officially backed claims of China manipulating its currency. Moreover, according to IMF's Articles of Agreement, the institution is supposed to facilitate free trade, which basically entails countries not to engage in depreciation to gain an unfair competitive advantage. However, the IMF may also not punish currency manipulators due to a lack of an enforcement mechanism which acts on those members who don't abide by its rules. The IMF also has no avenue for members to file complaints amongst themselves, they can only informally/symbolically call on other members to rally behind their case (i.e. former President Obama urging other IMF countries through economic summits to put pressure on China and President Trump previously labelling China as a currency manipulator). Moreover, the IMF may also choose not to act especially when the member to be reprimanded is least likely to borrow money from the institution. On the other hand, the WTO functions in the opposite direction. The WTO has a functioning complaint system which may cite violations of the General Agreement on Tariffs and Trade (GATT) against a currency manipulator as long as the consequences of manipulating the currency holds "major macroeconomic significance." However, unlike the IMF, the WTO does not have exchange rates under its jurisdiction. Thus, it may not push through with punishing a currency manipulator because of the limits of its institutional mandate and powers. Both the IMF and WTO are multilateral channels with legitimacy to discuss and handle issues on currency manipulation. Nonetheless, both may decide not to act on it lest such pressure on China could result in the country's withdrawal in the IMF or the WTO—an equally undesirable consequence.

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