Saw this article today on Yahoo finance, exactly inline with what I mentioned two days ago. Not very suprising that the deficit with China is getting better anytime soon since the yuan is fixed to the dollar by the Chinese government(yes governments are capable of manipulating exchange rates if they have enough reserves!) which is why the US government is so desperately trying to persuade China to increase its exchange rate for the yuan.
Increasing the exchange rate for the yuan has potentially positives and negatives. The primary negative for China is that it will make Chinese goods more expensive to the world and China has become heavily dependent on exports. The US argues that it’s not fair that China gets to sell its goods at much cheaper prices, but the benefits of a more valuable yuan also have mixed affects on the US economy. It will decrease the trade deficit but will also have a negative impact on corporate profits.
Think about how many items you purchased daily from China(pretty much every item in Walmart) and then consider what would happen if all the prices of those items doubled… yeah, not only will you buy less, giant retailers like Walmart are going to take a huge hit not just from the decrease in demand but also the fact that they can expect their profit margins to plummet.
I’m not too sure why the weak dollar is even a concern right now as the feds should still be able to influence the value of the dollar even with the deficit as large as it is. With our governments persistent interest in protecting large corporations, I can’t imagine why they would push to raise the value the yuan. Perhaps the US is genuinely afraid of loosing their sole super power world status to China, that they are willing to sacrafice some of their precious corporations?