Implications of Yuan/dollar exchange rate for trade

Abstract

PurposeThough an undervalued Yuan is not the only factor that contributes to the US bilateral trade deficit with China, it is widely accepted as being one of the leading factors. The heightened debate over the value of the Yuan may lead to “beggar thy neighbour” retaliation. The purpose of this paper is to provide a historical review of the Y/$ exchange rate movements, review the US congressional bills to revalue the Y/$ exchange rate and Chinese Government's reactions, presents a conceptual analysis of the effect of the undervalued Yuan on trade between China, the USA, and competitors, and discuss the arguments for and against revaluation of the Yuan.Design/methodology/approachConceptual analysis graphically illustrates how the undervalued Yuan affects world trade and shows the benefits and losses for various countries.FindingsThough an undervalued Yuan is not the only factor that contributes to the US bilateral trade deficit with China, it is widely accepted as being one of the leading factors. Due to its effects on production, consumption, and trade, a solution is needed. Although measuring the exact misalignment of the Chinese currency has led to various results, it is generally agreed that the Yuan is undervalued, and the US Congress has been persistent in introducing various bills to tackle the problems arising from the undervalued Yuan. Arguments for and against revaluation has heightened debate which may lead to “beggar thy neighbour” retaliation.Originality/valueThis paper outlines very timely and pretentious trade issues between China and the USA and contributes to the area of research of exchange rate effects on international trade.