U.S. to Impose Tariffs on Chinese Manufactured Goods

After reading the New York Times article “In Big Shift, U.S. Imposes Tariffs on Chinese Papers” (March 30, 2007), this is very much related to Adam Cash’s blog that mentioned China’s use of illegal subsidies on some of its exports.  The tariffs on Chinese exports marks the first time since the early 1980s that the United States has placed antisubsidy tariffs on a Communist country’s exports because it was hard for the U.S. to determine the definition of a subsidy in a state-controlled economy.  According to the article, the trade deficit with China reached $232.5 billion last year alone.  One would think that by making some Chinese exports more expensive, the U.S. government could decrease the trade deficit.  However, since the Chinese currency is tied to the U.S. Dollar and is undervalued, the trade imbalance between the U.S. and China is aggravated because exports to the U.S. are considered cheaper and imports to China are considered more expensive.  Thus, the deficit is exaggerated in value even more than it should be.  Going back to what was mentioned in class on 3/26 about the Portfolio Balance Model, if there is a current account surplus resulting from the antisubsidy duties placed on certain Chinese exports can it be assumed that the U.S. Dollar will depreciate?  If this logic is correct, what implications will this have for the Chinese economy which relies heavily on the value of the U.S. Dollar?

 The exchange rate between the U.S. Dollar and the Israel New Shekel (as of March 31, 2007) is 1 USD = 4.15780 ILS.

U.S. Economy

Recently, I have been looking at the papers and online news sources and all are saying the same thing–that the U.S. currency is falling in value relative to other currencies, most notably the Yen, Euro, and the British Pound.  What I don’t understand is that the Fed, which will meet on Tuesday, is likely to leave interest rates at 5.25 percent.  Maybe they see the current inflation rate as a blip on the radar and that in the future, the economy will stabilize so the interest rate doesn’t need to be raised.  However, all over the news is the issue with the recently turbulent stock market and the rising loan defaults for subprime mortgages, which are taken out by people with weak credit.  I tend to side with the worries of investors, many of whom feel that a recession may soon be felt.  In addition, China stated recently that it will start investing some of its $1 trillion reserves, which it claims will not affect the price of the U.S. Dollar.  Because a lot of foreign investments are building up in China–causing the foreign reserves to increase $20 billion monthly, China is faced with the dilemma of too much money in the market, something its central bank is combatting by selling bonds every month to reduce market pressures.  With all of this said, I would like to return to my opening remarks as to why the Fed is thinking of leaving the interest rate at its current level.  Why aren’t interest rates going to be changed to counter the inflationary tendencies and fall in the U.S. Dollar relative to other currencies to make our domestic economy more attractive to foreign investors?

 On a side note, the current Israel exchange rate is 1 USD = 4.209 ILS.  Below is a look at the ILS over a 3-month period courtesy of Yahoo! Finance: