Chinese currency pegging and U.S.-China trade tensions

Trade War Between U.S. And China

Trade War between the U.S. And China

Over the last several years, trade between U.S. And China (in terms of currency) has been exacerbated and increasingly brought to the forefront. At the heart of these arguments, is the belief that China should remove the peg against the U.S. dollar and let their currency float freely against the major ones. The problem arises around this issue itself, as this has been helping to contribute to a host of different challenges that have been leading to increased tensions. To fully understand the overall scope of these issues requires examining the relationship between: the two nations and how this could influence this affiliation down the road.

Major reason of the trade war between U.S. And China: globalization of production

The large account surplus caused some nations (i.e. The United States and the European Union) to accuse China of engaging a new form of mercantilism at their expense. This is when they are unfairly flooding trading partners with cheap imports. as, China created: an enormous current account surplus, hampering other nations' exports.

If left unchecked, this creates vast inequalities in the global economy, as key areas become deprived of wealth. As a result, the artificial peg on the Chinese currency, the yuan, has become a source of a major contention. The reason why, is because yuan is currently undervalued due to the peg.

Background of the trade war

At the heart of the issue, it is the overall rate that the Chinese should let the currency appreciate. As many Western nations are: calling for the peg to be completely removed, in order to assuage the current situation, in the hope of eradicating all trade imbalances. However, the Chinese firmly believe that they should take gradual steps towards revaluation. This is to avoid drastic moves that may affect economic growth and unemployment.

Therefore, the relations between these nations and China have become increasingly strained. This is the heart of a potential trade war; as the overall rate of currency revaluation could spark: heated emotions and animosity.

The problem arises around this issue itself, as this has been helping to contribute to a host of different challenges that have been leading to increased tensions. From the viewpoint of the U.S., China should remove the peg against the yuan. The reason why, is because they believe that it is giving them an unfair advantage over American companies (by keeping their costs artificially low). While China believes that they need to gradually reduce the peg, so that any kind of adverse affect from these changes will be limited. This is troubling, because these two different viewpoints increase the odds that some kind of: currency or trade war will take place in the future.

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China's Growth in the World Market

The Chinese government implemented a major economic reform program in 1978, after reducing state control of all production assets. Government officials urged the formation of: rural enterprises / private businesses, liberalized foreign investment / trade, allocated various resources from government to private entities (i.e. privatization) and they invested in education / training for workers. Many of these supply-side factors pushed the country to meet the demands of a dynamic economy. as, the government's strategy; worked much better than they had expected.

Before 1978, the Chinese economy had seen an annual growth of 6%. However, post-1978, China began to experience average real growth of more than 9%. This was a steady line of growth, as opposed to