Free Exchange Rate Regimes Essay Sample
China has retained an exchange rate regime, which favors its economic activities without taking note of the global economic interests, hence attracting criticism from U.S. and other major economic powers. China’s government has structured an exchange regime which favors its own people and business interests domestically and abroad. This deliberate attempt to manipulate the currency rather than leave the Yuan to market forces has adverse effects on the economies of its trade partners as this strategy favors China in the international trade platform (Radaelli, 2002).
It is undeniable that the Chinese do manipulate their currency by keeping it grossly undervalued as a tactic of creating favorable trade situations vis-a-vis with other competitors. It makes their products cheaper and makes it harder for other producers to compete at a similar scale with Chinese exporters (Klein, 2010). This has led to a negative balance of trade on the US side as the volume of imports versus exports to China increases. To counter this move, U.S. can pressure China to let its currency be subject only to forces of demand and supply and withdrawal all state interference with the Yuan. It might be challenging for the two nations to agree on the way forward since they are continuously competing on various sectors. The US can use its influence in WTO to pressure China to follow the economical traditions of other nations that are allied with the trade block. The US can also try offering economical incentives to China that would encourage the present regime to stop its currency manipulation.
Aggressive Critique of Chinese exchange regime is not the right way to address exchange rate issues affecting; consultations and compromise might yield better results (Moosa, 2000). US companies should strive to increase the quality of their products or employ tactics that reduce cost and in doing so make their products affordable and competitive on the global scale. Only then can they shield their operations from the threat of an undervalued Chinese currency.