Monday, April 5

China's relations with US

The reason why China is fast becoming a preferred investment destination and is a toigh competitor for India are not as obvious as it seems. Economic giant US is also not as dominating for China as it is for most other nations in the world. The fact that Chinese goods are sold at a low price across the world is not only because China has been able to able to leverage on the scale and cheap labour backed by solid manufacturing infrastructure.
The reasons are more than what meets the eye. The fact is that Chinese yuan is kept at an artificially low level, giving it an unfair advantage in selling its exports.
Based on this exchange rate, the US goods looks artificially inflated in price while Chinese goods look artificially deflated in price.

US exports to China in 2008 were $69.7 billion (exports to India were $25.7 bn) while the Imports were $337.8 billion (Imports from India were $17.682 bn).

China has not been letting its currency appreciate in a free market as it feels that this is an attempt to slow its growth although it is unanimously agreed that the currency is artificially undervalued by at least 25 percent.

The booming economy has also led to China standing against the US in most non economic issues as well; be it opposing US policy to sell arms to Taiwan, not supporting sanction against Iran, opposing US initiatives on climate change or opposing even Obama's meeting with Dalai Lama.

But why is the US tolerating all of this? It is indeed because the US needs China's cooperation to stabilise it's economy. China holds more than $2.4 trillion in US treasury and other assets. Recently China urged the US to maintain the value of dollar and reduced its holdings in US treasury by $34 billion. Again, in the times of recession where the disposable income of an American citizen has come down significantly, US needs the low-cost daily necessities that are made in China to fill its departmental stores.

It's time that China realise its shortcomings too. There have been various commercial disputes between the nations. The latest dispute with Google and the need of US markets for exports (which is the largest share of exports, so far), China will have to find a balance between keeping a low profile and maintaining the growing influence.

India, needs to rise now too.

References:
Forbes India (April 2010)
US Dept of Commerce, Bureau of Census

1 comment:

  1. "China has not been letting its currency appreciate in a free market as it feels that this is an attempt to slow its growth although it is unanimously agreed that the currency is artificially undervalued by at least 25 percent." - which is to say, it buys everything at an unsustainble 25% mark-up ... and still thrives? That an undervalued currency boosts exports and harms trading partners via a kind of "dumping" effect is largely a myth. What a nation "gains" in currency undervaluation it must on the other hand shell out in higher imports prices. Since in a globalised exonomy exported goods are built with foreign implements and machinery, since workers buy also foreign products and demand their wages to pay for them, most of these alleged gains cannot materialise as they are kept in check by the unnaturally high prices for imports. No one can have their lunch and eat it. Trade envoys invoking the dumping claim when it comes to alleged currency undervaluation really are trying to do the same thing as a tariff would achieve but resort to bullying as tariffs are prohibited by the WTO they themselves signed!

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