Discussion on Global Economics and The Theory of International Trade
- Miguel Virgen, PhD Student in Business
- May 7
- 15 min read
Discussion questions presented by:
Dr. Fereidoon Shahrokh
Answers by:
Miguel Virgen, PhD In Business Administration Student
In affiliation with:
American Military University
Exchange Rate
The United States and the European Union have been pressing China's government to alter its exchange rate policy to allow more flexibility, presumably so that the yuan will appreciate by a substantial amount. What has been and are China's policies toward the foreign exchange market? From the point of view of China's government and the well-being of the Chinese economy and people, what are the main reasons for the Chinese government to allow more flexibility and (probably) substantial yuan appreciation? What are the main reasons for China's government to maintain its current exchange rate policy?
China's policies toward the foreign exchange market?
When going through our class readings, I found in Chapter 12, Table 12.4: Exchange Rate Regime. It showed how China is a “Crawling Peg” type of regime. I was also able to find that according to the Peoples Bank of China, “China has moved into a managed floating exchange rate regime based on market demand and supply” (Xiaolian, 2010). I have not heard of the term Crawling Peg before until I read it in our text book, so the term is fairly new to me, but it would seem that the policy is meant for China to have economic stability. I believe China is one of the strongest communist country in the world and their efforts to manage their economic stability have limited their currency to float freely. As China being a major contributor in exports with the United States it would seem China would be trying to protect itself from overly exporting and becoming reliant on the US dollar that would result in the exporting going from a win-win deal to a win-lose deal in the long run.
Main reasons for the Chinese government to allow more flexibility and (probably) substantial yuan appreciation?
Allowing more flexibility can allow for substantial yuan appreciation by gaining the trust of global businesses as it would be a good sign to see China’s efforts toward a more open economy. This market confidence in China can result in yuan appreciation so then this could lead to Chinese exports becoming more expensive because of their stronger currency. There could be a possibility that this could shift China from being an export strategy country. “It is perceived that an exports led strategy is the only proven route to enrich the country’s status, as rapid currency appreciation and markedly slower export growth are in China’s best interest” (Kroeber, 2011). Since China is an independent geopolitical authority they have the capability to resist exchange rate policy changes demanded by international pressures. (Kroeber, 2011). For the well being of China and the locals a stronger yuan currency can help China move away from relying on the revenue from exporting to the United States and make other foreign goods cheaper for China to import.
Main reasons for China's government to maintain its current exchange rate policy?
According to this week's readings, “When China was accepted as a World Trade Organization (WTO) member country in 2001, it agreed to many demands made by other WTO members” (Chapter 1, Section 1.5). Although China has special safeguards they still strive to maintain their current exchange rate policy to help manage inflation and economic stability by keeping locals employed in jobs that rely on the exports industry. Hence, changing exchange rates can also have an impact on China’s Gross Domestic Product (GDP), unemployment, inflation, and interest rates.
References:
Kroeber, A. R. (2011, September 7). China’s Currency Policy Explained. Brookings. https://www.brookings.edu/articles/chinas-currency-policy-explained/
Xiaolian, H. (2010, July 15). A Managed Floating Exchange Rate Regime is an Established Policy. The Peoples Bank of China. http://www.pbc.gov.cn/english/130724/2881712/index.html#:~:text=China%20has%20moved%20into%20a,is%20also%20an%20established%20policy.
Saylor Academy (2012). International Economics Theory and Policy. "Chapter 1, Section 1.5, Chapter 12. Table 12.4. https://saylordotorg.github.io/text_international-economics-theory-and-policy/s04-introductory-trade-issues-hist.html
Tariffs
"A tariff on imports of a product hurts domestic consumers of this product more than it benefits domestic producers of this product." Do you agree or disagree? Why?
I would like to agree with the statement "A tariff on imports of a product hurts domestic consumers of this product more than it benefits domestic producers of this product" because there are simply more consumers than there are producers. According to our reading material, tariffs on imported goods leads to consumers purchasing from domestic producers rather than international producers. This increased demand will then lead to domestic producers to raise prices (Chapter 7, Section 7.4). Hence, tariffs on imported goods means consumers need to pay more for the same products, and the tariffs may also lead to some producers to not want to take on the added tariff costs thus reducing available imported products and reduced product choices consumers may have. If domestic producers do decide to take on the additional tariff costs they will surely increase their product prices having the consumers pay for the added tariff on imports. It would be easy to see that it would be an obvious net loss in consumer welfare. According to our textbook, The national welfare losses to the exporting nation exceed the national welfare gains to the importing nation. The reason is that any tariff set by a large country also reduces world welfare (Chapter 7, Section 7.9). When we compare the number of producers to consumers we can see that consumers drastically outnumber producers so then the benefits of a tariff on imports would not be worth the additional profits to producers. Which is why I agree that tariffs on imports hurts consumers more than it benefits producers because as consumers we should not be forced into higher prices, reduced product choices, and reduced welfare.
Reference:
Saylor Academy (2012). International Economics Theory and Policy. "Chapter 7, Sections 7.4, 7.9.
Anti Dumping
You have been asked to propose a specific revision of U.S. anti-dumping policy, to make it more likely to contribute to U.S. well-being. What will you propose?
The government decides whether to offer a $5 tariff depending on the procedural rules of the country in question. The tariff might be determined as part of an administered procedure, such as anti-dumping action (Saylor Academy 2012). How do we make sure that government officials and lawyers that are involved in lobbying actually have our best interests of the people and not profits through tariffs? I will request well-defined standards for starting anti-dumping inquiries and In order to help the general public understand how decisions are made, I would suggest expanding access to the data and methods used in lobbying. I would propose a focused strategy to anti-dumping investigations that prioritizes transparency, participation, and recurring evaluations of current policies in order to strengthen U.S. anti-dumping policy. I would then request public comment periods so that those interested in anti-dumping can offer valuable feedback on suggested anti-dumping policy with the ongoing evaluation of current anti-dumping practices.
The goal of my proposition to the US anti-dumping policy is to strike a balance between safeguarding local businesses and preventing undue hardship for consumers. I will make sure that anti-dumping policies have a good impact on the general state of the U.S. economy by increasing transparency, encouraging participation, and conducting frequent reviews.
Reference:
Saylor Academy (2012). International Economics Theory and Policy. "Chapter 10, Section 10.6 https://saylordotorg.github.io/text_international-economics-theory-and-policy/s04-introductory-trade-issues-hist.html
Economic Well-being
Many people argue that GDP is an inadequate measure of a nation’s economic well-being. Explain two reasons why this may be so.
There can be multiple reasons why Gross Domestic Product (GDP) might be seen as an inadequate measure of a nation’s economic well-being. Two points can be that GDP excludes non-market transactions such as free work done to maintain ones home, volunteer work done for the community, and contributions done to the economy that is not formally kept in record. The second reason can be that GDP does not include income distribution which means we have zero insights on data that shows how wealth is distributed in a countries population. In other words GDP does not reflect if the quality of life and well-being of certain populations are enhanced by means of family income sharing or families living and sharing resources together for an improved life. GDP does not account for income distribution effects that may be important to economic well-being (Saylor Academy, 2012). I can report that I am an unemployed full time student using the GI Bill on a limited pay check but GDP does not reflect an allowance that I receive from my parents as income so my living standards can be misinterpreted. In contrast, according to Chapter 13, Section 1 in our readings, “National wealth, on the other hand, measures the value of all goods, services, and assets available in an economy at a point in time and is perhaps a better measure of national economic well-being than GDP” (Saylor Academy, 2012). So then this would mean that rather than GDP, National Wealth would be a better indicator for a nation’s economic well-being.
Reference:
Saylor Academy (2012). International Economics Theory and Policy. "Chapter 13, Section 13.1, Chapter 12, Section 12.1. https://saylordotorg.github.io/text_international-economics-theory-and-policy/s04-introductory-trade-issues-hist.html
Trade Imbalance
International trade and trade policy continues to be an area of political debate. Consider the following statements concerning current account balances. Explain in what sense, if any, the statements are valid. In what sense, if any, are the statements misguided?
A current account deficit implies that our nation is giving away money to the rest of the world. A current account deficit indicates that a country has exported jobs to the rest of the world.A current account deficit implies that the nation must have a reduced standard of living in the future.
This was an interesting discussion topic that required analyzing what it means for a country to be considered in current account deficit. According to Chapter 13 of our readings, If exports of goods and services exceed imports then the country has a current account surplus. If imports exceed exports then the country has a current account deficit. (Saylor Academy, 2012). I concluded each statement regarding current account balances as follows:
A current account deficit implies that our nation is giving away money to the rest of the world This statement can be debated as some what true. A current account deficit means that a country is importing more goods and services than it is exporting. This can lead to an outflow of capital to foreign economies. However, it can be debated or misguided because it does not necessarily mean that the country is "giving away" money. The deficit can be financed through foreign investment which can mean that the country is attracting foreign capital from other countries.
As mentioned in Chapter 13 of our readings, “It is true that when imports of goods exceed exports, we are buying more foreign goods and services than foreigners are buying of ours. However, at the same time, a current account deficit implies a financial account surplus. A financial account surplus, in turn, means that foreigners are buying more of our assets than we are buying of theirs” (Saylor Academy, 2012).
A current account deficit indicates that a country has exported jobs to the rest of the world
There can be some truth to this statement, if the deficit is caused by increased importing of goods that are produced domestically then this can lead to some jobs being replaced in some sectors. On the other hand, a current account deficit would not imply that jobs are lost because it can also result from a country importing products.
A current account deficit implies that the nation must have a reduced standard of living in the future
This statement is the only statement that I would say is not valid. A current account deficit can mean future economic challenges if it results to unsustainable borrowing or dependence on foreign capital. Someone might debate that China is dependent on the U.S. for revenue in exporting goods, but China is not entirely dependent on the U.S. currency. This statement can be misguiding because a deficit can also mean that a country is investing heavily in growth opportunities that can improve future living standards. So the standard of living in the future could be improve even if there is a current account deficit.
While there are some elements of truth in these three statements, they can be misleading without additional insight of the underlying economic elements as to what causes current account deficits. After reading on the topic, it makes sense to me as to why international trade and trade policy is an area of political debate as these statements can be misinterpreted or misguided differently.
Reference:
Saylor Academy (2012). International Economics Theory and Policy. "Chapter 13, Sections 13.4, 13.5. https://saylordotorg.github.io/text_international-economics-theory-and-policy/s04-introductory-trade-issues-hist.html
Floating Exchange Rate
A country has had a steady value for its floating exchange rate (stated inversely as the domestic currency price of foreign currency) for a number of years. The country now tightens up on (reduces) its money supply dramatically. The country’s product price level is not immediately affected, but the price level gradually becomes lower (relative to what it otherwise would have been) during the next several years.
Why might the market exchange rate change a lot as this monetary tightening is announced and implemented?
What is the path of exchange rate likely to be over the next several years? Why?
To answer why the market exchange rate can change a lot as monetary tightening is announced, first lets look at the effects of money supply increases. Chapter 12, section 21.2 highlights the steps of what occurs in the economy when such monetary announcements and implementation takes place. When the money supply increases, money supply will exceed money demand in the economy. This would lead to foreign goods and services becoming more expensive while U.S. goods remain cheaper. This will raise demand for U.S. exports. This would then cause gross national product (GNP) and money demand to rise, causing an increase in U.S. interest rates (Saylor Academy, 2012).
Now that we were able to understand the cause and effects of money supply increase we can say that when monetary tightening is announced and implemented the opposite would occur from that explained previously. The announcement of a money supply reduction can be a sign for Investors that have predictions of lower inflation and potentially higher interest rates, making the domestic currency more attractive. Those that invest in the foreign exchange market might react in speculation and buy the U.S. currency anticipating that it will get stronger in the short run. However, long term effects might be different and would require proper timing of the markets.
The final long-run effect of an increase in the U.S. money supply in a floating exchange rate system is a depreciation of the U.S. dollar and no change in real GNP (Saylor Academy, 2012). Hence, The path of exchange rate over the next several years could involve inflation and maybe even a small recession as the economy tries to stabilize back to normal.
Reference:
Saylor Academy (2012). International Economics Theory and Policy. "Chapter 21, Sections 21.2, 21.4.
National Government and Bankruptcy
“Because a national government cannot go bankrupt, it is safe to lend to a foreign government.” Do you agree or disagree? Why?
I would disagree with this statement because governments can still default on their debts even if they have the ability to print more money. Even if a country does pay back the owed debt there is still risk that the the currency rate moves against the lenders favor. Although the government would not pose the same risks to lenders as a large company would there are still global risks to consider. Even beyond currency and global risks there even is an additional layer of risk due to politics. Political conflicts can increase the chances of default and a change in monetary policy might even reduce a countries willingness to pay back the owed debts.
This topic reminded me of an article I just read last week on how Apple’s investment into the Indonesian market backfired when they fell short on ensuring 40% of their smartphones to be made from local parts. Indonesia banned the sales of the iPhone 16 due to the tech giant not purchasing enough parts from local manufactures which is a reminder that even large companies that want to scale and invest in international markets need to be aware of the legal risks associated with the countries regulations on international companies conducting business in their country. Hence, even if an investor is not lending to a government there are other forms of risks that vary and depending on the countries laws, regulations, politics, currency, and global risks.
Read more at:
U.S. Recessions Impacts
A recession in the United States is likely to raise the growth of real GDP in Europe. Do you agree or disagree? Why?
I do not believe that if the welfare of Americans were to decrease this in turn would increase the GDP of Europe. At least not directly. This is because if the United States goes through a recession then this would reduce the amount of foreign goods we purchase from Europe. We Americans love our imported wines but if the people reduce their living standards we would not spend so much on unnecessary purchases and this reduction in spending on foreign goods would also reduce the sales of European exports to the U.S. Furthermore, big U.S. companies might also reduce the amount of overseas investments in Europe as they look to outsource to cheaper countries in Asia. Although a reduction in GDP in the U.S. might make it cheaper for Europe to purchase goods and services from us, the effects of our GDP decreasing would have far greater negative effects for Europe for them to be able to raise their GDP from simply taking advantage of our reduced costs of goods in a recession.
The Assignment Rule
The assignment rule suggests using fiscal policy to control the domestic economy and monetary policy to influence the BOP. What are its possible advantages and drawbacks of following this rule?
The key elements in question include fiscal policy, domestic economy, monetary policy, and balance of payments (BOP). Chapter 23 of this weeks readings mentioned how policies work differently under a system of fixed exchange rates rather than floating rates. Monetary policy can lose its effectiveness whereas fiscal policy can become supereffective. Some possible advantages of using fiscal policy to control the domestic economy and monetary policy to manage the balance of payments may include targeted effectiveness, flexibility in policy implementation, and stabilizing the balance of currencies. On the other hand, there may be risks in regards to conflicts between domestic and external goals, sudden shifts in capital flows, and possible increase risk of inflation. Every fixed exchange rate system requires countries to give up the independence of their monetary policy regardless of domestic economic circumstances. Doing so is difficult, or impossible to do. This is demonstrated by the collapse of what was known as the Bretton Woods system (Saylor Academy, 2012). A balance of payments (BOP) crisis would occur if the country gets close to running out of foreign exchange reserves. The bottom line is that the main drawbacks of following the assignment rule is the possible policy conflicts, along with the trade-offs between achieving both domestic economic and global economic goals.
Reference:
Saylor Academy (2012). International Economics Theory and Policy. "Chapter 23, Sections 23.6, 23.7.
Fiscal Policy and Exchange Rate
A country has a floating exchange rate. Government spending now increases in an effort to reduce unemployment. What is the effect of this policy change on the exchange rate value of the country’s currency? Under what circumstances does the exchange rate reduce the expansionary effect of the fiscal change?
The effect of this policy change on the exchange rate value of the country’s currency may include; a strengthening the currency, along with more expensive domestic goods and services. The increased government spending also increases the domestic aggregate demand, and this can lead to higher interest rates. As global investment increases the demand for the domestic currency appreciates in value. A stronger domestic currency would result in the country's goods and services becoming more expensive for foreign buyers. As a result we might see a reduction in exports but a rise in imports.
Some circumstances where the exchange rate can reduce the expansionary effect of the fiscal policy may include, worsening of the trade balance, reduction in export demand, and unpredictable investor behavior where the fiscal changes can influence investors to push the currency value up even higher. If the central bank does not intervene, the appreciation of the currency can reduce the effectiveness of the fiscal stimulus. If the central bank acts to reduce the money supply, it is referred to as contractionary monetary policy (Saylor Academy, 2012). The increase in currency can reduce the expansionary effect of the fiscal policy by reducing exporting activity since the costs of exporting will become more expensive while imports become cheaper. Hence, the exchange rate can reduce the expansionary impact of government spending. An intervention will affect the interest rate and the inflation rate. Since central banks are entrusted to keep domestic price stability or to assist in maintaining appropriate interest rates, a low unemployment rate, and GDP growth, Intervention is usually done when the expansionary effects start to work against the economy.
Reference:
Saylor Academy (2012). International Economics Theory and Policy. "Chapter 21, Sections 21.5
European Union
As you know, Britain has voted to leave the European Community and negotiations between both sides have started. Interestingly enough, Britain had never adopted the Euro, and always kept control of her monetary policy. What do you think are some positives and negatives experienced by countries that are part of the European Monetary Union?
This is a case of euroization. Since these countries now share the euro as a common currency, their exchange rates are effectively fixed to each other at a 1:1 ratio. As other countries in the EU join the common currency, they too will be forever fixing their exchange rate to the euro (Saylor Academy, 2012). Some positives aspects of being part of the European Monetary Union is that it offers advantages, such as increased trade, reduces transaction costs, and a helps maintain a stable macroeconomic environment. On the other hand, some negatives include the loss of individual control over monetary policy, and fiscal constraints. One of the reasons Britain has decided not to join the eurozone is because it wants to maintain its monetary autonomy. By joining the eurozone, Britain would give up its central bank’s ability to control its domestic money supply since euros would circulate instead of British pounds (Saylor Academy, 2012). It seems like the major drawbacks for Eurozone countries is the loss of control over their individual monetary policies. Since the European Central Bank sets interest rates and makes decisions about money supply for the entire Eurozone, countries are not able to make changes to their monetary policies in order to devalue their currency or adjust interest rates to deal with recessions or market booms. Although Britain is growing much more slowly, it remains outside the eurozone, and is able to keep its freedom to determine the monetary policies that it believes is best for itself.
Reference:
Saylor Academy (2012). International Economics Theory and Policy. Chapters 22, Ch. 24, Sections 22.2, 24.4
Keywords:
Global economics, theory of international trade, exchange rate, china's policies towards the foreign exchange market, Main reasons for the Chinese government to allow more flexibility and (probably) substantial yuan appreciation, Main reasons for China's government to maintain its current exchange rate policy, Tariffs, Anti Dumping, Economic Well being, GDP, Trade Imbalance, Floating Exchange Rate, National Government and Bankruptcy, US Recessions Impacts, The Assignment Rule
