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.
Great subject I feel this issue is quickly coming to a head, it seems the recession has really made Americans look at both sides of the equation. The problem context is well developed and explains how the problem occurred. I can draw that the problem has recently really came to the surface. The behavior over time is explains how this occurred over time perhaps a little more history would explain when the problem developed. I’m wondering where in history the Chinese really started to push their U.S. export policy. The policy now in play explains the situation very well, I remember reading literature in middle school suggesting that this issue would become a major policy problem, and here we are again with a known problem that the U.S. has essentially made no plans to address.
ReplyDeleteThe Dynamic hypothesis is well thought out, I follow the logic to understand what is going on. The first two CLD’s are easy to understand the third one is a little hard to follow. I also wonder what affect this would have on China’s retention of U.S. bonds. It’s kind of scary to agitate China because they are a large holder of U.S. debt, would they retaliate? I wonder if you could add retaliation loop, if we put a tariff on imports I question that they would take a more aggressive step than further devaluing their currency. Of course that is just me thinking out loud. This is a really interesting subject if you figure this out I’m sure the current administration or U.N has a job opening.
Ken has extended his look at the Chinese Export/ Tariff issue to now include a Dynamic Hypothesis. The one issue that seems to affect Ken's discussion is the lack of interconnection between Tariffs and what China would do to retaliate. The way he has it drawn right now, the US needs to raise Tariffs and not look back. However, in his concerns, he listed the worry of retaliation and the concern that the Tariffs would lower Chinese economic activity and would somehow affect the US economic well being. If this is related to the Peg of Dollar to the Yuan, then it needs to be brought into the Boundary of the Problem and not be Exogenous.
ReplyDeleteBrooks, I would have loved to incorporate the peg of the Yuan to the Dollar in my CLD but it just does not work within the limitations of our polarities. For instance, if the Yuan appreciates against the Dollar, China would increase their purchase of US Treasuries to strengthen the Dollar against the Yuan. However, if the Chinese economic activity decreased and the value of the Yuan decreased against the Dollar what would China have to do? Nothing. This decrease in the value of the Yuan would only strengthen China's competitive advantage against the U.S and fuel the trade imbalance.
ReplyDeleteA well laid out dynamic hypothesis. Your loops are easy to follow with the provided descriptions. It makes more sense now to my non-economist mind than the problem articulation alone.
ReplyDeleteI saw no problems in your CLD. The retaliation loop would be an interesting study. I do not think China's retaliation would be entirely pleasant.
Ken
ReplyDeleteMuch improvements from the 1st draft problem articulation. Nicely done! The CLD's are reasonable, given the scope of this assignment. You've obviously had to greatly simplify this. A more extended analysis would dig into the details a good bit more.
You say in the 1st paragraph: "many people are pointing to China’s currency policies as the driving source of this inequality." Isn't this a bit strong (particularly to say "THE driving force?" It's probably more accurate to say that many people point to China's policies as an important factor (but not the ONLY factor).
I agree with Brooks about the need to account for Chinese actions here. That, I think is the main concern holding back policy makers (though I have to admit, I'm far from an expert on this). Your current analysis just focuses on the balancing effects of a tariff policy...i.e. we impose tariffs until things get better, and then we ease off on them....I think the big concern is not just what China might do in the currency markets, but also what China might do to take corresponding protective measures against the U.S....drastically cutting orders on US goods, and thereby keeping the trade imbalance at unacceptable levels. The net reduction in economic growth for the US could be devastating. This interconnectedness between the US and Chinese economies is not spelled out so explicitly in your Dyn Hyp.
You mentioned in your comment to Brooks that there is a problem with the polarities regarding the "Pegging" policy, should the Yuan fall vs the dollar. You say "if the Chinese economic activity decreased and the value of the Yuan decreased against the Dollar what would China have to do? Nothing" True, that means that their pursuit of the "pegging policy" would be less than it would have otherwise (as their economy shrinks, pursuit of the policy also shrinks....or would it increase as the Chinese seek to drive the dollar higher to stimulate more US purchase of Chinese goods? I think the problem is that your variable "peg of yuan to the dollar" probably needs to eliminated and replace by variables representing actions by Chinese to control the currency. You could have a variable called "chinese purchase of US currency" for example. You also probably need a variable called something like "Chinese purchase of US goods." This opens the door for exploring the retaliatory effects.
Even with these suggestions...a very nice job for this pilot effort!
Hello Ken, sorry for the late post, I had originally posted this weeks ago.
ReplyDeleteGoing back to the idea of tariffs, it would be very interesting I think if you would focus on that like Dr Deaton mentioned. It is similar in nature to my topic, (effects of sanctions, and the tit for tat that results from that). China lately responded to the news of an upcoming US report on the devaluation with ''don't blame your problems
on us'' type rhetoric. It is almost certain that the imposition of tariffs on their
exports will result in a retaliation. It would be interesting to see your final model,
as the impacts will surely be far reaching, as is now always the case in the globalization
era.