South-Western College Publishing - Economics  
Chinese Hot Spot
Topic International Trade
Key Words Imports, Exports, and the Trade Balance
Full Article

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Reference ID: A160452857

News Story With China's trade surplus with the rest of the world continued to grow at a rapid pace even during the winter months when typically exports lag and the surplus shrinks. It is common for the Chinese economy to experience large surpluses in late summer and fall, when deliveries are made to retailers preparing for the Christmas season, but this year was an exception as the surplus grew to $23.76 billion over the winter months.

The rising Chinese trade surplus with the United States is producing additional pressure in Congress to pass laws related to slowing the growing surplus. Washington lawmakers have proposed steep duties on Chinese exports unless China takes action to end government subsidies to industries and to allow its currency to rise faster against the dollar.

Chinese policies that subsidize industry make it harder for American companies to compete in the global market place and congress wants action. Additionally, China supports their currency, the yuan, to keep it from rising against the dollar. This action makes Chinese goods cheaper and American goods more expensive, once again making it hard for U.S. companies to compete.

The latest trade statistic, "will no doubt inflame political tensions on China trade," said R. Glenn Hubbard, a former chairman of President Bush's Council of Economic Advisers who is now the dean of Columbia University Business School.

One proposal in Congress will place a 27.5 percent tax on American imports from China unless the Chinese government comes to the table and allows significant appreciation of the yuan against the dollar. If the Chinese would allow their currency to depreciate it would make their exports more expensive in the U.S., and make U.S. exports cheaper in China. The result would be a lessening of the trade surplus, a goal desired by Washington.

As recently as last week, Treasury Secretary Henry M. Paulson Jr. called for China to free its financial system from government control and allow the yuan to appreciate. Still, the administration is criticized for not setting benchmarks for how fast the yuan should appreciate or threatening specific responses if any benchmarks are not met.

Discussion Questions:
1. Discuss the notion of a trade surplus.
2. How does an appreciating yuan against the dollar reduce the trade surplus?
Multiple Choice/True False Questions:
1. A trade deficit occurs when:
  1. government raises the interest rate.
  2. exports exceed imports.
  3. real GDP increases.
  4. imports exceed exports.
2. If China allows the yuan to appreciate against the dollar:
  1. the prices of American exports will rise.
  2. the prices of Chinese exports will rise.
  3. the prices of American exports will fall.
  4. there will be no change in any export prices.
Source Keith Bradsher, "China's Trade Surplus Nears a Record High," The New York Times Online, March 13, 2007.
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