Problem context
The Chinese economy has emerged as a major international power and one of the world’s leading exporters. The United States has embraced Chinese imports and benefitted from a higher standard of living due to the cheaper prices that accompany these items. With the recent recession and the growing trade imbalance between the two countries, many Americans have begun to question the fairness of this arrangement. Given the decline in American manufacturing and the high unemployment rate, many people are pointing to China’s currency policies as the driving source of this inequality.
Behavior over time
The trade imbalance with China has been growing since the mid-1980’s. Many people feel that Chinese currency policies during this time have left American manufacturers with a serious disadvantage when it comes to competition with Chinese goods in terms of price.
Policies now in place or under consideration
The Chinese government has pursued a policy of pegging the value of the Yuan to the dollar and actively participating in the currency markets to maintain the pegged value. Some members of Congress have suggested that China be labeled a currency manipulator and that tariffs be applied to Chinese goods.
Issues and concerns with the current situation or policies
Given the interconnected nature of two of the world’s largest economies, the start of protectionist policies such as tariffs could lead to a trade war and negatively affect the economies of both countries. While the idea of tariffs can be viewed as a favorable way to increase domestic manufacturing, the possibility exists that this could scuttle Chinese growth and ultimately lead to a decline in American economic activity.
Study purpose and questions to be addressed
The purpose of this study is to determine the overall effects of tariffs on the trade balance between China and the United States and their affect on the overall health of both economies.
DYNAMIC HYPOTHESIS
Current System Structure
The current state of trade between the United States and China has been viewed as mutually beneficial for both economies. Through the importation of cheap Chinese goods, the citizens of the United States have seen the average cost of the goods they purchase decrease and this has lead to an increase in the quality of their lives and driven economic prosperity. By maintaining a favorable peg of the Chinese Yuan to the U.S. Dollar, China has been able to grow the size of their economy through their manufacturing base and offer cheap products to the U.S. for export. This has lead to China becoming one of the world’s largest exporting countries and a sizeable trade imbalance with the United States. The people of the United States have been relatively happy with this arrangement until the recent economic recession left their economy badly shaken.
INTENDED CONSEQUENCES
Given the struggle to emerge from the recent recession, many American’s have begun to pressure the elected leaders of their country to label China a currency manipulator due to their peg of the Yuan to the Dollar. Many American’s believe that the present trade imbalance between China and the United States is unsustainable and that the only way to remedy this is to apply tariffs to Chinese goods. This would lead to an increase in the cost of Chinese goods and thus make them appear less favorable than other potential sources of these goods. After the imposition of tariffs, many American’s believe that the United State’s manufacturing sector would become energized, as they were able to complete with Chinese goods on a cost basis. Naturally, this would lead to a decline in the unemployment rate and an accompanying rise in wages and disposable income to improve the quality of American lives.
UNINTENDED CONSEQUENCES
The unintended consequence of this would be that as economic activity in the United States increased due to increased manufacturing activity, the pressure to punish China for their currency manipulation would decrease and lead to the repeal or lessening of tariffs. Also, in order to stimulate American manufacturing through the imposition of tariffs, the average cost of the goods purchased in the United States would have to increase, possibly offsetting whatever gains were made in their increased disposable income. In the meantime, China would react to the imposition of tariffs with currency policy designed to further devalue the Yuan and maintain the Chinese Manufacturer’s competitive advantage.
