Research Proposal on "China's Currency the Decision"

Research Proposal 4 pages (1210 words) Sources: 1

[EXCERPT] . . . .

China's Currency Case Study

The decision in July, 2005 to index the yuan to an index of foreign currencies has proven to be more problematic than many had originally anticipated, causing the cost advantages of Chinese manufacturing to become even more pronounced (Lo, 2007). Combined with the dominance of China in manufacturing, distribution and retailing industries and their growing dominance in manufacturing supply chains (Taj, 2008), the re-indexing of the yuan to an index of currencies relative to staying indexed only to the dollar has actually increased global inflation. U.S. lawmakers are concerned, and leaning towards protectionism in the case study, which is a dangerous strategy when one considers the balance of trade is in that nations' favor today (Hu, Su, Chen, 2008). The case study concludes with a discussion of the Baucus-Grassley Bill which seeks to legislate what many had hoped the re-indexing of the currencies would achieve in a free market. The re-indexing of the yuan and its immediate increase in value by 2.1% and the fact that the U.S. is currently running an even larger deficit that the $200 billion mentioned in 2006 today shows that the Chinese economy is much more robust than had been attributed just to its currency valuations (Hale, Hale, 2008). The case concludes with the options open to the U.S. And the potential filing of complaints with the World Trade Organization (WTO) and the completion of the Baucus-Grassley Bill that will impose terms on Chinese trade to in effect deliver the results the yuan re-indexing was thought to be able to accomplish. The case shows how uncertain indexing currencies can be in high growth economies.

Questions:

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1. Consumer goods including shoes and electronics represent about 80% of U.S. imports from China. American consumers have saved an estimated $600 billion over the last 10 years by buying inexpensive Chinese goods. If the Chinese government re-evaluates the yuan by 20% or more and the American consumers pay higher prices, is this a desirable outcome?

Simply put, no, it is not. There are much broader issues than just the prices American consumers are paying for shoes and electronics. What must be taken into account are the supply chains for these products and those in just as critical of industries as consumer apparels, electronics and textiles. Consider industrial manufacturing, investments in R&D centers in China by Cisco, Microsoft and others, and also the development of entirely new approaches to distributed manufacturing that don't have just Chinese implications. These developments have global implications for manufacturing efficiency and performance. China's approach to manufacturing has shown that lean production and sourcing strategies can work even in a nation not as highly automated and integrated with technology as the U.S. (Taj, 2008). China's emergence as a global manufacturing center would be seriously impacted by a 20% increase in prices based on the re-evaluation of the yuan. The Chinese government must also look not only at its own revenue gains but those from other nations as well. Seeking out a more equitable and market-based approach is going to result in lower prices for consumers not only in the U.S. But globally. Second, it will ensure that the speed and efficiency of the Chinese supply chains continue to fuel the rapid GDP and GNP growth the country continues to experience as a result of rapid global expansion (Hu, Su, Chen, 2008).

2. Protectionist sentiments in the U.S. are fueled by the argument that China is to blame for the flood of imports, the giant U.S. current account deficit, and the downward pressure on wages in some industries. Do you agree?

No, I do not agree with protectionist… READ MORE

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