Exchange Rate Policies - Essay Example

Exchange Rate Policies Comparative advantage is the mantra for global trading in current times. Nations try to achieve comparative advantage through various means such as technology, just-in-time logistics and many more. Exchange rate is one of the many ways that country can use to their advantage in global trading (Douma & Schreuder, 2008). This paper explores how China has used the exchange rate mechanism in maintaining the comparative advantage for its producers and what the U.S. can do to counter it.

China is the largest trading partner of the U.S. and it has successfully managed the exchange rate of its currency to their advantage. It would be worth contemplating the trade gap between these two countries in the last four years as enumerated in the following table. All figures are in millions of U.S. dollarsYearExports to ChinaImports from ChinaBalance2011103,939.4399,361.9-295,422.5201091,880.6364,943.9-273,063.2200969,496.7296,373.9-226,877.2200869,732.8337,772.6-268,039.

8 Source: http://www.census.gov/foreign-trade/balance/c5700.htmlAbove balance of trade in favor of China says a lot about the comparative advantage that China has in a vast array of goods. Moreover, the pertinent point is that China has successfully tilted the advantage in its favor through a managed exchange rate regime. It is of no surprise that China has accumulated over $3trillion in its reserve through this comparative advantage in trade. A couple of years back, China had pegged its currency Yuan at about 8.

28/dollar and that remained at that level fairly for a long time. China transited to a ‘managed float’ in 2005 but till date it has refrained from ‘free floating’ Yuan. China does so because it does not want to see its currency appreciate against dollar. In doing so, China may lose the comparative advantage that it has gained across a wide range of goods. The U.S. is passing through a dire recession and unemployment rate continues to hover around 9 percent for last several quarters. There is no denying to the fact that the U.S. industries are at great loss so far comparative advantage is concerned.

That is why economists like Krugman (2011) strongly advocates that a weak dollar is in the interest of U.S. to protect its producers. That is also a way to eliminate the U.S. trade gap with China providing a level playing field to the U.S. manufactures. ReferencesDouma, S. W.; Schreuder, H. (2008). Economic Approaches to Organizations. Prentice Hall, New York. Print.Krugman, P. (2011). Holding China to Account. The New York Times. Retrieved 14 August, 2012 from http://www.nytimes.com/2011/10/03/opinion/holding-china-to-account.

htmlTrade in Goods with China (2012). United States Census Bureau. Retrieved 14 August, 2012 from http://www.census.gov/foreign-trade/balance/c5700.htmlhttp://cepfe.nmsu.edu/?q=book/print/31