What is International Trade - Essay Example

        Countries produce goods and services in which they have the expertise to produce at the most economical costs and exchange them with goods and services of other countries in which others are more economical. This international exchange of goods and services helps expand the global economy rapidly. International trade is good for consumers of all countries because they get goods and services at the most economical prices; however, certain manufacturers suffer due to their higher costs of production either due to costlier labor or higher raw material costs in their own countries. Overall, international trade is good as it helps expand the world economy using valuable and limited resources most judiciously (Investopedia). 

        Consumers in the US are benefitted from the weak Yuan due to the nonexistence of a free market for determining exchange rates. Goods imported from China are available at much lower prices than possible to get from the local manufacturers.  This leads to higher disposable income for American consumers that can be used for satisfying their other needs (Picardo).

Source: http://www.tradingeconomics.com/china/currency

          The above graph represents the exchange rate between the USD and Chinese Yuan between May 30, 2011, and November 30, 2013.  It is clearly evident that the exchange rate of 6.5 Yuan for one US dollar in May 2011 improved to 6.1 Yuan during November 2013. Emily Kaiser argues, "A sharp rise in China's Yuan currency might cut the U.S. trade deficit by as much as one third and create enough American jobs" (Huffingtonpost); this can create enough jobs in the US. China does not have a free-market exchange mechanism to determine exchange rates rather it relies on administered exchange rates. In view of this, it has several implications as discussed in the following paragraphs.

         In 1994, China pegged its currency to the dollar at about 8.28 Yuan per dollar; the rate continued until July 2005 then the establishment gradually allowed Yuan to appreciate until 2008. When the global crisis encompassed the world economies, China stopped further appreciation of its currency. Many economists rightly contend that the appreciation of the Yuan would hurt US consumers and downstream product manufacturers who use Chinese components in their production process (Morrison and Labonte, 12).  It is true that appreciating Yuan may boost US exports to China (Picardo). However, several concerns have been raised in the US over china's currency policy. Jobs and trade deficits are prominent among them. The Economic Policy Institute (EPI) claims that China's currency policy is responsible for the loss of 2.7 million jobs in the US and the majority of the job losses were in the manufacturing sector (Morrison and Labonte, 12).

Many economists see huge US budgetary deficits along with deficits in trade and savings as a big risk factor for the US dollar to maintain its position as the world's reserve currency in the international market in the years ahead (Barboza).