It was made apparent before President Hu Jintao of China visited the United States on his state visit that President Obama was clear on the fact that China was manipulating its currency and that he would bring it up. China’s usual response is that “currency is dictated by the markets” and not politicians. Which does make a lot of sense.
But if we look at how weak the Chinese currency is in comparison to its actual economy you can see why people would say that the currency is being manipulated. The reason why Chinese manufacturing and agriculture is so lucrative are for two main reasons, they are:
Large trade surplus. How and why? The reason China has a large trading surplus is because their currency is weak. What this means is that foreign currency goes a long way into purchasing goods, services and everything that is manufactured in China. Not only this, China does not have much policy on human rights or specifically working rights. So the working environment does not have to be in-condition acceptable to workers or people in the west. A huge saving in cost for business but not considered particularly ethical by most standards in the west. Not only this wages are also poor and the largest cost of a business is its labour force and its goods. – Of which both are very cheap in China. This is why manufacturing for the most part has moved from the west to China where they now manufacture most goods and are getting better at manufacturing highly advanced stuff at cheap, cheap costs.
Take for example a recent interview with Piers Morgan and Donald Trump. Donald Trump was correct in saying that it is hard to compete with China when they can do things at cheaper expense and where the currency additionally helps in making something that should be expensive in one country, really cheap in another. This is why the manufacturing base in most countries have moved away. Because companies cannot compete with China since what China is selling you, is the whole package for a business. They have cheap workers with no working rights, no pay rights and have what is considered by many economists and high level figure heads such as President Obama a currency which is being manipulated. A perfect place to start a business, one would think and in practise this has been rapidly happening over many, many years. – Which is in effect is why China has been for 30 years (Mostly) been growing at an average of 10% per year; which is obviously a fantastic result.
China also has a very large population, according to sources a population of around 1.3 billion people. That is a huge market which international companies could try and tap. However it is impossible to tap that market since international currency is very expensive for the ordinary Chinese people. President Obama additionally brought this up in a press conference with President Hu Jintao. What is happening is that the Chinese system is all one way.
For example, Chinese goods are relatively cheap for Chinese people however if you introduce goods which are produced elsewhere they are very expensive for these reasons:
- Western companies who manufacture goods in decent working environments along with good pay to its workers cannot compete with the Chinese. – Since it does not incorporate decent pay to its citizens nor can it compete with Chinese low currency, since additional cost for foreign goods is accumulated due to Chinese cheap currency when converting currency to the Chinese Yuan. So for example goods will cost almost double in most currencies since other currencies are worth much more. So the 1.3 billion Chinese are going to get more from purchasing Chinese goods than in purchasing goods from the European Union for example. It is working all one way at the moment with the Chinese economy booming for under decades of cheap labour and ultra-high exports.
What can be done?
Not much can be done. The damage is already done and most of the manufacturing base has been moved over to China. However if China is indeed manipulating its currency you can fight back by introducing taxes if indeed China is not playing by the rules. You introduce an import tax on all Chinese imports to the same level as a competing provider of the same goods who manufactures in the US. The US and other western economies would benefit and you could tell China that your human rights and work ethics are unacceptable and only until these shoddy work ethics are dropped and they stop manipulating their currency; only then will China listen to you.
Should it be done?
Western and mostly American companies are profiting on the back of a Chinese economy which is run on exports. Not only this they are benefiting in the west from using sweat shops where workers are underpaid by western definition; these are western companies being opportunist. It undermines the values that the west hold, under a democratic standing where the people of China do not have that right. These are two reasons why it should be done on moral and economic standing. The US needs a larger home based manufacturing base to keep its economy afloat and it could be argued that this could be achieved by imposing more protectionist laws. – Which the Chinese have in-place.