ECON420
Analysis of U.S. Import Tariffs on Chinese Solar Panels
In several years, the cheaper goods from China destroyed the industries of local goods, especially those of candles and screws and now even solar panels in US. The demand for domestic goods decreases so rapidly that few people want to buy it. The whole small things industry in US has fallen into a great dilemma because of the impact from Chinese goods. Using the knowledge we learnt in Economic class, we can easily explain this phenomenon by analyzing Chinese government’s trade strategy.
First of all, before talking about this trade dispute, we should understand the definition of dumping. According to the definition from Wikipedia.org, "dumping" is a kind of predatory pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price either below the price charged in its home market or below its cost of production. Here we can know in order to make dumping possible, price differential is a big factor. Artificial control of exchange rate could be a good idea. Exchange rate is the value of one currency expressed in terms of another currency. For example, one US dollar can currently be exchanged for approximately 6.07 Chinese yuan. China sets the value of its currency, the yuan, to always equal a set amount of a basket of currencies which includes the dollar. In other words, Chinapegs its currency to the dollar using a fixed exchange rate. When the dollar loses value, China buys dollars through U.S. Treasuries to support it. In this way, the yuan's value is always within its targeted range. As long as the yuan's value is lower than the dollar, China's goods are cheaper in comparison. See the graph below. We can make an analysis that if China, as now it does, keeps the value of yuan in a lower level, the excess demand of Chinese yuan will lead to the market unbalanced, which is shown by the left graph. That is why China keeps using its large amounts of Yuan to buy the US debts, making the demand of Chinese yuan seems to be decreased and, on the other hand, the value of US dollar to be higher. As the right-side graph shown below, the action taken by Chinese government to buy the US debts returns the balance to the exchange market since China uses yuan to buy the US debts, which means that China keep selling the yuan to make the price of yuan to be much lower than the common level.
Figure 1: an inward shift in the supply of yuan indirectly equals to the outward shift in the demand of US dollar, making the price of yuan undervalued
The reason for China to keep the value of yuan in a low level is obvious to other countries. A stronger yuan will make Chinese exports less competitive and many manufacturers have to close. A weak yuan, on the other side, makes the price of exporting goods lower to the foreign countries. Therefore, exporting goods from China can obviously be more competitive than the substitute of other goods. In this situation, dumping could be possible. Although the domestic importing companies will be destroyed due to the low purchasing power of Chinese yuan, the weak-yuan policy is generally beneficial for Chinese economy but unfair for US’s industries and also the rest of the world’s industries. This will stimulate the development of importing industries of those countries, but the low price of goods from China makes domestic industries easily defeat their opponents from other countries and consequently makes the Chinese industries, especially those low-cost industries, to have a dominant position in those fields of industries, which means that monopoly has been formed during the process. We can imagine that without the taxes and other actions of protectionism, China will dominate the teddy-making industries, craft-making industries, and high-tech industries like solar panel industry. Unemployment in the same fields in other countries would be exceptionally high.
