Exchange Rates between U.S. and China Management Essay

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Exchange Rates between U.S. and China
Introduction
Exchange rates play a major role in international trade. According to Kang and Dagli, exchange rates impact trade and as a result, many countries strive to implement effective exchange rate policies to secure a strong position in international trade (84). Also, effective exchange rate policies enhance the stability of the domestic economy. The exchange rates are one of the major factors affecting the trade and exchange relations between the U.S. and China. This paper examines the effect of exchange rates on multinational corporations, the balance of payments, the balance of trade in the U.S. and China, and their overall effect on the trade relations between the two countries.
Effects of Exchange Rates on Multinational Corporations
Assessing the effect of exchange rates on multinational companies with operations in the U.S. and China is crucial. The exchange rate of any country affects its external competitiveness (Bostan, Toderascu, and Firtescu), which enhances the performance of multinational companies in the country. Also, fluctuations in exchange rates affect the demand and selling prices of products supplied by multinational companies (Chen, Lee, and Huang, 132). This is because the fluctuations affect the cash flow of the corporations through the three components of exchange risks namely; the economic, transaction, and translation exposure. The U.S. and China have some of the largest multinational companies and therefore, their policies on exchange rates are fundamental in the performance of these companies. Over the recent past, China has been termed as a currency manipulator in its efforts to gain a competitive advantage in international trade. This has affected U.S. multinationals. According to Chen, Lee, and Huang, the devaluation of Chinese currency often stimulates exports and consequently “affects the value of multinational corporations in the United States” (133). Also, a devalued currency makes exports cheaper and imports more expensive. Thus, China’s devalued currency, in this case, benefits U.S. multinational, exporting firms with operations in China. In addition, multinational, exporting companies experience a negative exchange rate exposure when the Chinese currency depreciates and the U.S. currency appreciates (Chen, Lee, and Huang, 136). This negative exposure causes a decrease in the value of the multinational companies.
Effects of Exchange Rates on Balance of Payments in U.S. and China
To better understand how the exchange rate affects trade in the U.S. and China, we need to examine the balance of payments in both countries. According to Ribeiro, McCombie, and Lima, if there exists a real exchange rate misalignment, the effect would be felt most on the balance of payments as such misalignments are likely to cause a crisis in the balance of payments (2). The balance of payments accounts for the difference between the inflow of foreign exchange and the outflow of foreign exchange (Shafi, Hua and Satti, 183). Countries use different exchange rate policies, which also have different effects on their balance of payments. Some countries devalue their currency and other...