The Yuan

Following the opening up of the Chinese economy to capitalist notions in 1976 by Deng Xiapong, the Chinese economy has shown sky rocketing growth and within a period of 32 years, has become the second largest economy in the world, second only to the USA. The economy is largely production and export driven, with goods manufactured in China flooding markets from Hawaii to Tokyo as a result of its ability to produce goods of all kinds at the lowest possible price thanks to its low labor costs.

Issue:

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However, according to Mian (2007), “some experts on International trade policy and industry professionals themselves claim that China’s export competitiveness is driven in large by its artificially maintained cheap currency, which makes Chinese exports appear cheaper in foreign currency and thus precludes fair competition in international trade, besides pointing to fundamental systematic weaknesses in the long run” (P. 45). The question than is to address this issue either through a revaluation of the Yuan or through export tariffs, while looking at the point of view of a Chinese exporter.

Analysis:

Theoretically speaking, an upward revaluation of the Yuan would have the effect of making exports expensive and imports cheaper. At face value, this would hurt any Chinese exporter dealing in textiles or any other item, as they would find increased competition at home and abroad. However, one also needs to look at the fact that China is a net importer of energy in the shape of oil and gas and also heavily reliant upon foreign imports as part of the input process. In this regard, it seems reasonable to believe that, to some extent, the increase in export prices would be matched with an element of reduced imported input prices. However, the extent of this coverage would vary from product to product. In conclusion, the overall effect of an upward revaluation in the value of the Yuan on the export competitiveness of China would be knocked off by resultant cheaper imports.

Therefore, as a Chinese non-textile exporter, an export tariff on selected textiles would be preferable, as it would leave the status quo unchanged for me. However, if I were to be dealing in textiles, both choices would be bitter pills. Therefore, the best of the worse outcomes would have to be chosen. In this regard, if the elasticity of demand for my product is low as is the case, according to Mian (2007) with most low priced, high quality textiles (P.46), in the main markets that I serve, I would be willing to accept an export tariff as long as the it leaves my competitive position largely unchanged and, at the same time, allows for the passing on of the extra cost to the consumer.

Conclusion:

To conclude, an export tariff on selected garments and textiles seems a better option as long as elasticity of demand and the actual amount of the tariff is reasonable. This would allow a status quo to be maintained for all Chinese exporters as far as costs and revenues are concerned and would only partially affect the fortunes of the textile exporters. The other option, an upward revaluation of the Yuan would have an across the board effect and would hamper overall export competitiveness.