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Secondly, it could also be argued that United States and United Kingdom will not benefit in the long run due to the revaluation of the RMB. This is due to the fact that the real effect of prices in the two countries will move the exchange rate to the previous equilibrium. But in the short run countries trading with china will benefit from the revaluation of RMB. Other factors such as cheap labor and raw material prices also contribute to the cheap value of Chinese goods rather than only currency valuation. Even if the RMB is revalued, and consequently China retaliates through tariffs on the import of goods than this would not benefit United States and United Kingdom, as tariffs would increase the prices of these goods in the Chinese markets. Another measure that the Chinese government could resort to in case of revaluation of RMB is the provision of subsidiaries to its industries. This means that even if the Chinese goods become expensive in the international market on the basis of higher exchange rate of RMB, its effect could consequently be eliminated by the provision of subsidies (Corden 1994). This would decrease the cost of production which means that prices of these goods experience a decline and once again cost the consumers as in the pre-revaluation period.
Another reason for not revaluing the RMB is because the revaluation of RMB will decrease Chinese exports which mean that Chinese national income experiences a fall resulting in a fall in U.S. imports which would consequently cause...
And UK exports on china. The revaluation of RMB could also mean that Chinese manufacturers cut their margins which would not affect the prices of Chinese goods. And if china loses its share in U.S. exports due to RMB revaluation, than there is a possibility that other low cost producers such as India and Bangladesh might take over.
The last valid reason put forward for not revaluing the RMB is the fact that this would have negative effects on the world economy. Usually people in the high income groups will still be able to consume Chinese products even if prices of Chinese goods rise. On the other hand, countries would try to offset the increase in the prices of their imports by a consequent rise in the value of their exports which means an overall rise in the international price levels. As countries such as U.S. And Italy are in the high income groups they will experience a deficit due to an increase in their value of imports as the price index for Chinese goods rise.
Thus it is evident that more evidences can be found in the support of not revaluing the RMB as this would be having a negative impact on the international economy.
References
Corden, W 1994, 'Economic policy, exchange rates and the international system.' Oxford University Press, U.K.
Baumol, W & Blinder, A 2011, 'Macroeconomics: Principles and policy'. Cengage Learning, USA.
Madura, J 2009, 'International financial management'. Cengage, Learning.
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