International Trade - China’s Move to Adopt a Floating Exchange Rate

International Trade

Introduction

An exchange rate refers to the value a currency is given at the international market. This enables a nation to know its economic position and compare its activities with those of other nations (Piersanti 3). This paper uses the term international business to mean trading activities that involve a nation and other nations. This essay explores various issues about exchange rates and international business.

China’s Move to Adopt a Floating Exchange Rate

A floating exchange rate refers to a situation where the value of a currency is determined by global market conditions like economic growth and crisis. China is experiencing a significant growth in its international operations and seems to be growing at a commendable rate (Hill 2). Most of this is achieved through contracts signed with African countries, and this has promoted the economy of China.

Currently, this country uses a fixed exchange rate that is determined by internal forces like lending regulations observed by local banks. Even though, this country manages to maintain the stability of its currency this essay assumes that it has decided to adopt a floating exchange rate and signed an agreement with World Trading Organization (WTO) to implement this change in three stages. This new exchange rate regime will have the following effects on China, United States and other trade partners.

First, China will have a stable exchange rate in the international market since the value of its currency will remain constant. It will continue to transact its international business without fear of inflation or economic crisis, and if this occurs it will affect all nations regardless of their level of participation in international trade. However, in case it experiences economic crisis it will be bailed out by the World Bank just like it did to Brazil and Greece in 2002 and 2010 respectively. Thirdly, there will be many investment opportunities in China since it will open its gates for international business (Goldstein 78). Some investors are reluctant to invest in nations that have fixed exchange rate systems since their economies are usually unpredictable.

In addition, there will be employment opportunities since the local market will develop its operations. In addition, it will be easy to expand local activities since there will be market for their products. Lastly, this will be an effective way for China to reduce its balance of payment and trade deficits. However, according to Mundell-Flemming Economic Model this will affect China’s ability to control its currency; therefore, denying it sovereignty over its economic policies. In addition, it will be forced to adopt some policies that may not favor its operations like banking policies and national budget.

This decision will give China opportunity to compete with America in