1. Should China revalue the yuan
against the dollar? If so, what impact might this have on 1) US balance of
payments, (2) Chinese balance of payments, (3) relative competitiveness of
Mexico and Thailand, (4) firms such as Walmart, and (5) US and Chinese retail
consumers?
China
has pegged its currency to the US dollar (at RMB 8.3 to the dollar) since 1994.
As in other countries, this was to ensure that currency volatility would not
interfere with trade and investment flows on which the country's growth vitally
depends, and to build confidence in the currency and the government's
management of it. When a government pegs its currency, it essentially commits
to a non-inflationary monetary and fiscal policy - something which the Chinese
have consistently delivered.
I
don’t think it has affected US manufactures and US job loss as Chinese imports
are too small to have much of an impact on the US macro-economy. It only
account for less than 10% of all US imports and Chinese imports are far less
than 2% of US GDP. Therefore blaming china for the job lost is simply wrong. Instead
US business consumers in the manufacturing sector are benefitted by the cheap
Chinese imports as it has helped many US industries to compete in global market
which would not have been possible if they were restricted only to US-based
production. Hence, low value of yuan is helping US consumers keeping the low
inflation rate and interest rates. Those who think that revaluation will
decrease imports from China, they are wrong. They are ignoring the fact that
surplus dollar earning of China is funding the huge US budget deficit and
keeping interest rate low. And let’s not forget that China comes second after
Japan as a purchaser of US Treasury bills which has been helping dollar to be
strong.
In
context of China, if the yuan is revalued it will make China’s exports more
expensive, leading to the decrease in exports. This will slow down the entire
economy. Other manufacturing countries will look for alternatives as labor
costs increases which will automatically create unemployment causing social
instability in China. There will be total financial instability in China as it
has heavily debt-burdened, inefficient state-owned financial system.
The
revaluation of yuan poses an unacceptable risk as no one knows for sure how
much any currency is over or under valued. There will be more and more speculation
to the further movements of the currency, destabilizing it.
And
yes if Chinese Yuan is revalued then some trade will be lost from China, some
exports will go away from China. And moving back to US manufacturing industry
they’ll move to Mexico or Thailand and some other countries that are very
competitive in that sort of low to medium tech manufacturing space.
Regarding
firms in US companies whose imports totally depends on the country like China,
they’ll have to pay more dollars if the Chinese yuan is appreciated. So, the
company may face losses in their P/L accounts and for staying in competition
they might search for several alternatives to minimize such costs.
And
for company like Walmart, it is affected so much because most of their stock is
purchased from China.
Talking
about the US retail consumers, as Chinese yuan is revalued, the purchasing
power of the dollar might decrease affecting the whole retail industry which
imports goods from China. They will have to pay more dollar to purchase same
goods from China.
Chinese
exporter will be benefited as they will get more of dollar for the same goods
as their purchasing power of the yuan is increased. But overall the Chinese
economy might go down, US economy and other economy might search for other
economies which is cheaper in comparison to China causing political and
economic instability in China.
2. You are an IMF official going to a
country whose export earnings are not able to pay for imports. The government
has requested a loan from the IMF. In which areas would you recommend the
government make cuts: (1) education, (2) salaries of officials, (3) food
subsidies, and/or (4) tax rebates for exporters?
A
country in severe financial trouble, unable to pay its international bills,
poses potential problems for the stability of the international financial
system, which the IMF was created to protect. Any member country, whether rich,
middle-income, or poor, can turn to the IMF for financing if it has a balance
of payments need—that is, if it cannot find sufficient financing on affordable
terms in the capital markets to make its international payments and maintain a
safe level of reserves.
If
the government has requested a loan from the IMF, I would recommend government
to make cuts on food subsidies. Regarding education, I think government should
not cut its spending on education as it is the one of the important sector to
invest in. And talking about the salaries of officials, it is the right of the
officials to get paid for the services they provide to the government and if it
has been cut off they might be de-motivated. Likewise, tax rebates for
exporters must be not be ignored as it will boost up the economy indirectly. If
exporters are sure that the money they paid will be rebate they will be encouraged
to engage in global business.
In
case of making cuts on food subsidies, they only make political sense but they
don’t make any economic sense. They were designed to aid lower-income families
but instead it creates problems of insufficient calories for children and cause
obesity problems as well. Thus, such programs only unnecessarily serves more
recipients and increase the cost of government.
Those
programs should be left for the private charities. Also it will help the
farmers to produce more and increase its production. It will greatly affect the
economy by creating more jobs in agricultural sector.
3. Critics argue that thanks to NAFTA,
a flood of subsidized US food imports wiped out Mexico’s small farmers. Some
1.3 million farm jobs disappeared. Consequently, the number of illegal
immigrants to the US skyrocketed. What is your view on NAFTA, CAFTA, and FTAA?
The
Free Trade Area of the Americas
(FTAA) was a proposed agreement
to eliminate or reduce the trade
barriers among all countries in the Americas,
excluding Cuba.
The
North American Free Trade Agreement (NAFTA), came into effect on January 1,
1994, creating the largest free trade region in the world, generating economic
growth and helping to raise the standard of living for the people of all three
member countries, Canada, Mexico and United States.
The
United States-Dominican Republic-Central America Free Trade Agreement (CAFTA)
is the latest in a series of Free Trade Agreements (FTAs) that the United
States has entered into with its neighbors in the Western Hemisphere.
CAFTA
opens, not only a new era in trade between the United States and its neighbors,
but also new opportunities for U.S. companies and U.S. operations of foreign
companies. Historically, the United States has been the main trading partner of
each of the countries in the agreement—Costa
Rica,
the
Dominican Republic, El
Salvador, Guatemala,
Honduras,
and Nicaragua.
The
main advantages of regional integration is the availability of newer, cheaper,
faster and more diversified goods, services, resources, facilities, ideas and
knowledge as well as higher living standards. Without customs and other
restrictions companies can take advantage of expanding markets which will
ultimately increase its profits.US exports to Canada and Mexico has been
increased since the implementation of NAFTA which has supported millions of
Americans.
In
the similar way, CAFTA has helped U.S as tariffs on more than 80% of U.S
exports has been eliminated. Some other benefits of these kinds of regional
integration is that as it is reciprocal trade agreement, all the member
countries will be benefitted one way or another. It helps in creating better
business environments and access to markets. Similarly, as the competition
increases gradually, the consumers will be benefitted. Likewise, it will take
into consideration labor rights and environmental protection. But there is a
debate that only strong nations will be benefited by such integration becoming
more and more powerful day by day whereas weak nations will always remain in
shadows. Yes, strong nations will always remain in power but weak nations are
also benefitted from such regional integration.
These
kinds of regional integration has its own pros and cons. But for me, I think we
should encourage such integration as it helps in economic development and
maintaining peace in the member countries. If the country can sustain
economically then slowly and gradually the political system will also be
stable. Therefore, the country will be economically prosperous and with peace
and harmony people can have higher living standards.
4. While Greece needs help, the German
economy has also suffered a major recession itself and a budget deficit. Would
you advise the chancellor to bail out or not to bail out Greece? As a German
taxpayer, are you willing to pay higher taxes to help Greece (bear in mind,
after Greece, there might be Ireland, Portugal and possibly Spain)?
Greece
is a part of European Union and it has been creating economic problem in all
countries of EU because of the great economic depression it has been going
through. Because of the economic crisis it is facing, this has been creating
the problem of the devaluation of the Euro currency and making it weaker in the
global financial market.
As
the powerhouse of the European Union, Germany has been helping Greece to boost
up its economy by providing loans. In some of the economies like Ireland and
other countries these kind of bail out has worked and brought a quick return to
growth. But in case of Greece, it has been failure because of increased taxes
and cutting pensions which has caused social unrest and poverty. The government
of Greece itself is not working to boost up its economy instead it is creating
hurdles to the works of nations like Germany who are willing to bail it out.
And if I had to advise the chancellor, I would advise him/ her to bail out
Greece as Germany is center of European Union and it is the responsibility of
the country to help in times of need. Not only this, I will advise the Greece
to implement policies which will help the economy to come out of depression.
But
if the German government refused to bail-out this can lead to a prolonged
period of shrinking economical activity which can ultimately affect Germany in
future. Later on, if the economy recovers, the investment can also be
recovered.
Yes, I will definitely pay higher taxes to
bailout Greece if the tax is refundable.
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