Is trade with China a form of appeasement or paid tribute since they do not buy our goods or revalue currency?
- NCLv 71 decade agoFavorite Answer
Neither. Bank of China buys large quantities of U.S. government bonds, thereby helping to keep U.S. interest rates low and contributing to the expansion of home ownership in the U.S.
Also, recall that U.S. consulates in China have recently toughened visa requirements for business visitors; as a result, it is much more difficult for a Chinese business person to get a visa to go to the U.S. compared to a visa to go to Japan, Australia, or Europe. As a result, buying from the U.S. is severely impeded.
As to valuation of the currency, the yuan may well be overvalued. A fair relative valuation of two currencies is one that prevails in a free market when both countries are in external equilibrium (i.e., maintain a near-zero trade balance) and in internal equilibrium (i.e., unemployment is at a non-inflation-accelerating level). U.S. and China are clearly in an external disequilibrium (U.S. has a trade deficit, China, a trade surplus), so many people notice it and hasten to conclude that the yuan must be undervalued. What they don't realize is that China has an enormous frictional unemployment problem. Every year, millions and millions of people move from the countryside into the cities, where they have a mighty hard time trying to make a living. Large unemployment would suggest that the currency is in fact overvalued...
Finally, inflation in China in recent years has been substantially higher than in the U.S., suggesting that the yuan is indeed overvalued...
- 1 decade ago
China is one of the largest purchasers of securities, so most of our government spending is done with loans from them.
If the Chinese stopped re-buying securities, the Federal Reserve (a private bank, not a government branch) would have to print the money or offer higher rates of return on those securities - either of which would accelerate the disintegration of the dollar.
There are other factors, such as globalization and moves toward world government and currency, but I suspect the largest reason for preferential treatment is that China is allowing the US to maintain the illusion of prosperity, both directly through the relending our money back to us, and indirectly by stocking the shelves of walmart with cheap crap.
- ?Lv 61 decade ago
The U.S. Gov't is keeping Americans happy by allowing cheap products into the U.S. If all that stuff was made here, there'd be a lot of angry people, paying a fortune for those goodies. There'd be an armed march on Washington, and we'd vote the current crop of bums out of office in 2008. Cheap prices camouflage the inflation we'd have if it wasn't for China.