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Something pretty interesting is happening in the international political economy right now. For some time, experts have believed that China has been artificially devaluing its currency (the yuan). This devaluation has allowed China’s price on exports to remain low and competitive in the international market, which has contributed greatly to the country’s rapidly growing economy. When he first took office, President Trump promised to be tough on China and to pressure them into appreciating their currency so that they would be competing fairly with countries around the world. Recently though, the Federal Reserve has actually increased interest rates in the U.S… and Trump’s team has yet to comment on it.

Increasing US interest rates is in no way helping the Trump administration achieve its goals–in fact, it’s doing the opposite. Increasing interest rates would appreciate the US $, and the Chinese yuan would depreciate even further in relation to the dollar. This would allow US importers to buy Chinese exports at a cheaper price, making Chinese goods even more competitive here in the US. Meanwhile, appreciating the dollar would also make US exports cost more, which ultimately makes them less competitive on the international market.

Trump has been very vocal about his support of an appreciated yuan because, as he says, it would give American businesses a bigger advantage. The economic rationale behind this idea that, should the yuan appreciate, China’s exports will become more expensive and less competitive on the international market, which would discourage US importers from buying them and perhaps give them more incentive to buy domestically. This would also cause the US $ to depreciate in relation to the yuan, which would make US exports cheaper for Chinese importers to buy.

In reality, however, it doesn’t seem too plausible that the appreciation of the yuan would lead to China importing more US goods. Economically speaking, there are probably other countries China could get their imports from which, now that their currency is appreciated, would be more price competitive to them than US exports. And politically speaking, after the US essentially bullied China into depreciating their currency, it would look pretty bad for China to then reward the US by buying more of their trade products. I imagine China would turn to other countries to get their imports.

After all, the appreciation of the yuan would hurt the Chinese domestic economy greatly, especially since they have an export based economy. If their main industries were suddenly much less profitable, they would have to implement a whole new economic strategy–but not before many companies went under and thousands (if not millions) of people lost their jobs, I’d imagine. The domestic political consequences would be huge as well. Even though China is not a democracy, the leaders in the export industry are extremely influential political forces. If the yuan appreciated, they could use collective action to effectively lobby the government into potentially devaluing the yuan once more.

These large Chinese exporting companies are extremely influential forces on the Chinese government, and are powerful enough to keep the yuan from appreciating. Chinese importers are much less powerful, so even though appreciating the Yuan would help them, they are overlooked in favor of the exporters (who benefit greatly from a devalued yuan). Meanwhile in the US, the most influential economic forces want the same thing as China’s exporters: Large multinational corporations and Wall Street benefit from the undervalued currency because they manufacture goods in China and export them from there. Manufacturing goods is cheaper to do when China has a devalued currency, and products that are shipped back to the US or around the world can be sold at a more competitive price. So even though the US government has spoken out against the devalued yuan, they would never be able to force it to devalue without losing the highly-valued support of Wall Street and the MNCs. And even if they tried, Chinese exports would never allow their government to go through with it.

This might explain why when interest rates were raised, Trump didn’t make much of a fuss. If I were him, I’d be looking for a way to back out of this particular promise as well.