Despite the insatiable Chinese demand for capital goods (which has also had beneficial impact on German exports and growth), China's trade surplus reached a record of $26.9bn (£13.5bn) in June, twice as high as a year earlier, as Chinese manufacturers rushed to fill orders before reductions in official export incentives came into force on 1 July.
Exports went up by 27.1 per cent (on June 2006) and imports climbed 14.2 per cent. Last year's $177.5bn trade gap was a record. Much of the balance derives from America.
The persistent undervaluation of the Chinese currency worries about intellectual piracy and the quality of Chinese goods and the low pay and relatively poor conditions of Chinese workers have become a source of friction between Washington and Beijing. The US trade deficit with China reached a record $232.5bn in 2006.
The Chinese refuse to sanction anything more than the slowest of progress on the Yuan.
The rows have spilled over into the US national political arena, with Democratic presidential hopefuls Hillary Clinton and Barack Obama co-sponsoring legislation forcing more rapid progress on Chinese trade.
Nor is the surplus an unalloyed gain for China. Vast foreign currency earnings have fuelled inflation and stock market and property bubbles.
Copyright © 2007, independent.co.uk
Commentary Number 3
China has always been accused by its trading partners for keeping “Vast foreign currency earnings that have fuelled inflation and stock market and property bubbles”. In , an export is any or , from one country to another. When the Chinese currency is low, the value of the exports in comparison with other countries would be relatively cheaper.
To maintain that the value of the Yuan is low, China uses massive amounts of its currency to purchase foreign currencies, such as the dollar, and recently, the pound. When China uses the Yuan to buy these foreign currencies, such as the pound in this case, the demand for the pound and the supply of the Chinese Yuan will both increase. This is illustrated in both FIGURE 1 and FIGURE 2 below.
A trade surplus1 in the Chinese economy leads to an increase in the demand for the Yuan, causing the demand curve to shift to the right from Dy1 to Dy2 (FIGURE 1). This shift in the demand will eventually cause an increase in the exchange rate2 for the Yuan to P2. Consequently, an increase demand for the Yuan means that the supply of the currencies of china’s trading partners will increase ---> a shift in the supply curve from S1 to S2 presented in FIGURE 2.
“It is China, Hong Kong and South Korea who are demanding UK exports”. Despite the insatiable Chinese demand for capital goods, china’s trade surplus reached a record of $26.9bn in June, twice as high as a year earlier because of the incentives that are given to Chinese manufacturers to increase exports.
The persistent undervaluation of the Chinese currency worries have been a source of friction between Washington and Beijing. The US trade deficit with China reached a record $232.5bn in 2006. Since the low exchange rate of the Yuan makes Chinese goods cheaper relative to American goods, Chinese exports to the US considerably exceed American exports to china causing the United States to have this trade deficit3.
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1 A positive , i.e. exceed .
2 The price of one currency in terms of another.
3 When the total value of imports exceed the total value of exports.
The proposal of a tariff4 on Chinese imports by UK officials would further narrow the trade gap that they are facing. The tariff would raise the price of Chinese goods, allowing UK firms to compete with Chinese goods.
Certain goods are initially sold at a price of P1: Q1 goods are supplied by UK firms while Q4 - Q1 goods are supplied by foreign firms (e.g. China). When the UK imposes tariffs on Chinese goods, the world supply will decrease as it has been less profitable for Chinese producers to export to the UK because of higher costs of production. As a result, the world supply curve (SWorld) will shift upwards to SWorld+tariff and the market price will increase to P2. At this price, UK firms will be competitive with any foreign firms up to the quantity Q2: Firms in the UK will supply Q2 goods and foreign producers will reduce the amount they supply form Q4 – Q1 to Q3 – Q2. As a result of all this, import expenditure will decrease from the region between Q1 and Q4 to the region between Q2 and Q3 (M), improving the trade balance.
The low value of the Yuan means that foreigners (e.g. US and UK) have to use less of their own home currency to buy Chinese exports. Increasing the value of the Yuan would cause Chinese goods to become relatively more expensive for foreigners, who might then switch to domestic goods and/or imports from other countries, therefore reducing the trade gap5.
On the other hand, imposing tariffs on Chinese goods is more likely to worsen the trade deficit. The imposition of the tariffs will damage the Chinese economy and therefore reduce china’s ability to buy the United Kingdoms exports. Basically, there is a trade off6 for every attempt done to improve the economic situation.
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4 A tax levied on imports to increase the competitiveness of domestic goods.
5 The difference in value over a period of time of a country's imports and exports of merchandise (Balance of Trade).
6 The Lose of one quality or aspect of something in return for gaining another quality or aspect.
