Government attempts to shorten trade gap with China

U.S. Treasury Secretary Henry Paulson recently attempted to achieve a breakthrough on the unbalanced exchange rate between the United States and China. U.S. manufacturers claim that the exchange rate gives Chinese products an unfair edge in world markets.

12/15/2007


U.S. Treasury Secretary Henry Paulson recently attempted to achieve a breakthrough on the unbalanced exchange rate between the United States and China. U.S. manufacturers claim that the exchange rate gives Chinese products an unfair edge in world markets.

The U.S. trade deficit with China will exceed $232 billion this year and continues to rise. Since July 2005, China began allowing its currency to rise against the dollar. The value of the yuan has increased 12%, which should increase the cost of Chinese products for customers paying with dollars. However, according to the Bureau of Labor Statistics, over that period, the price of Chinese imports rose by less than 1%. Meanwhile, prices of goods imported from elsewhere rose 6.4%, which explains why Chinese goods have become more competitive in the United States despite the yuan’s appreciation.

The rise in productivity from 1993 to 2005 formed the groundwork for the current trade market. During that time, Chinese workers became more than four times as productive as state-owned companies absorbed Western technologies and management practices. The productivity increased by an annual average of 20.4%. U.S. manufacturers fear that Chinese firms may be absorbing the effects of the rising yuan by shrinking profit margins in order to retain their market share.

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