In the article “Eye on China and United States”, Milad Mahyari and Minoo Alemi evaluate the economic effects of imposing tariffs on Chinese imports by the US. The authors allege that the US strives to avoid inflation by forcing China to agree to an increase in the exchange rate. Since China has rejected the agreement, the US is imposing tariffs on Chinese imports like tires and steel. Consequently, China has begun imposing tariffs on poultry imports from the US. China used to manipulate its currency in a way that made it cheaper to sell its products and expensive to sell US products. This made the US to lose about $1.5 billion thus increasing the rate of unemployment. Although the US is trying to strengthen its growth power, imposing tariffs could result into worldwide trade war.
Mahyari & Alemi (2011) assert that placing tariffs on Chinese products is a retaliatory exercise because it devalues the Chinese currency. Although most Americans supported this idea, the authors allege that they did not understand its consequences. Over the years, China and the US have been trading partners: China provided the US with imports while the US invested in China. Economic conflicts between the two countries began in 2005. The US did not like the fact that China had maintained an exchange rate of 8.28 for many years. As a result it proposed a 27.5% tariff on all products from China but the Chinese government rejected the move in fear of recession.
Investment is a key factor in the China-US relationship. China’s major investment in the US is in foreign direct investment and Holdings of US securities. On the other hand, the US Treasury securities are in China. The conflict between the two countries has made it difficult to transact business and the US is likely to be the major loser. Unfortunately, the drama that began in 2005 has heated up instead of being solved.
The authors believe that the main cause of conflict is the increased rate of unemployment in the US. The US expects that the tariffs will improve the US economy and create more jobs. The importation of Chinese tires has fallen by 30%. However, the statistics by the labor of theory show that the tire-making job in the US has fallen by 10%. While Chinese products are cheap in the global market, the US should understand that there are other countries like Thailand and Vietnam which have cheap products too. Imposing tariffs on China would therefore not stop people from buying tires from such countries. Mahyari & Alemi (2011) suggest that the US needs China more than China needs it because China holds the largest US debt of $ 847 billion.
It is very clear that China is keen to maintain the low value of the Yuan in order to increase its value of exports and imports. At the G20 meeting, China and Germany were encouraged to alter their exchange rate so as to encourage domestic spending (Sharpe, 2012). According to the economic theory, the Chinese consumers should be allowed to buy products from America. The economic principle of people’s choice suggests that people choose alternatives with the best benefit at the lowest cost. The US on the other hand should spend and invest more and regulate on their borrowing. Mahyari & Alemi (2011) predict that the US would lose in the economic war with China because China is a stable and wealthy country that does business all over the world. It would therefore be risky for the US to lose China as a business partner.