Download Topic 2 - Academy Model United Nations

ACADEMY MODEL UNITED NATIONS
2012
BERGEN COUNTY ACADEMIES
INTERNATIONAL MONETARY
FUND
SARAH ROTHSTEIN
HOPE YI
TOPIC 2: THE US DOLLAR VS. THE CHINESE RENMINBI
nations. In the context of the IMF, China
plays a key role, since it holds the largest
amount of foreign exchange reserves in the
world; there is actually a surplus in China’s
foreign reserve account that is equivalent to
10.5% of its annual economic output!
Introduction
How does the IMF Reserve Work?
Circa ten years after the Great Depression
swept the international market, the
International Monetary Fund (IMF) was
established to avoid a repeat of the
competitive devaluations that had
contributed to the economic catastrophe;
IMF exists to build a framework for
economic cooperation on a global scale.
In order to maintain its strong economy, the
Chinese government is aware that the
country’s total consumption needs to be
increased in the long run. Therefore, it is
allowing the value of the Renminbi (RMB)
to appreciate. Raising the value of the RMB
reduces the cost of imports, thereby,
increasing the real value of household
income; this will allow for a rebalancing of
the Chinese economy. However, this must
be done at a steady pace, for a rapid increase
of the RMB will not lead to an increase in
consumption, but a decrease. Therefore, the
Chinese keep the value of the RMB
relatively low, hoping to increase it
progressively to suit long run economic
goals.
With this goal in mind, the IMF issues
Special Drawing Rights (SDRs), an
international reserve asset that can
supplement the official reserves of the
participating nations in order to support a
fixed exchange system. In other words,
SDRs are allocated by the IMF to the 187
IMF member countries, and the countries
may convert these allocated SDRs into cash
through a system of swaps manned by the
IMF. This keeps the international currency
system on a common ground, regardless of
the difference types of currency that exist in
each country. In order to keep the standard
consistent, SDRs are given values based on
the four main international currencies: the
US dollar, the euro, the Japanese yen, and
the British pound sterling.
The United States Economy
The value of the dollar has abruptly declined
by 10% since June 2010. With the United
States as a major global power, the country’s
weakening currency is causing the delicate
balance of world economies to become
further disturbed, as it continues to recover
from past financial crises. If the United
States cannot pick up their low interest rates
and declining dollar, investors will be prone
to resort to other foreign markets,
overheating those countries’ respective
economies. Furthermore, such weakness of
the United States economy can poorly
reflect the perception of the country as a
whole.
Generally, SDRs are used by the
governments of developed and developing
countries alike to stimulate a stagnant
economy, substitute dried up investments,
boost spending on social programs, etc.
The Issue
The Chinese Economy
China is ranked third in the world’s largest
economies and second of the largest trading
2
In order to attempt to spur growth, the
Federal Reserve has injected great sums of
money into the
economy, through a
process
called
quantitative easing.
Moreover,
the
United States, in its
belief that China is
manipulating
its
economy,
is
demanding
immediate action
from China (which
needs to adjust its
value of the RMB
gradually to avoid
overheating);
according to IMF
reports, a 20%
trade-weighted
appreciation on the
Chinese RMB could result in a 0.05-0.07%
increase in the growth of the US economy.
Thus, it is in the best interest of the United
States to push China to have the RMB
appreciate rapidly, and it will forcefully do
so by means of tariffs, trade restrictions,
etc.; however, such rapid appreciation is the
direct opposite of China’s economic goals.
countries (similarly to China) are soaring
due to the dollar’s decline, since investors
are beginning to resort to such countries’
markets over that of the United States.
However, the downside is that these nations
are at risk of overheating (strong demand
not met by increased supply, causing
inflation), since their domestic economics
are attracting floods of speculative capital
seeking higher interest rates. These nations,
particularly Brazil, South Korea, and
Indonesia, have enacted capital controls to
strengthen their banking systems and lower
interest rates.
Furthermore, it is important to note the role
of Germany and Japan, countries that were
also pressured to appreciate their currencies;
however, unlike China, these countries gave
in to pressure, since they were militarily
dependent on the United States in the 1970s.
The current matter between the United
States and China can be applied especially
to the latter of the two countries, as seen
through the Plaza Accord of 1985, for which
the doubled value of the Japanese yen was a
result.
Possible Solutions and Scenarios
Pressured Appreciation of the RMB
The IMF can have China’s economy geared
more towards a consumer-driven growth
model, as opposed to its current reliance on
exports and investment. This change may
have to come at the expense of the Chinese
economy, one whose potential currency
appreciation may or may not have
considerable power over the global market.
In short, the United States needs to balance
its trade with China: the United States has a
deficit with China, while China has a surplus
with the United States. Such imbalance is
bound to affect the global economy as both
countries are economic leaders.
The Global Perspective
Due to the decline of the dollar,
industrialized economies, especially ones
that work cohesively with the United States,
such as Japan, Britain, etc. are struggling.
Internationalization of the RMB
As China is a major player in global trade
and the world’s leading exporter, it makes
sense to increase the use of RMB to invoice
and settle global trade, parallel to the four
major economic currencies.
On the other hand, emerging markets, such
as those in Latin America and in Asian
3
http://www.nytimes.com/2010/10/21/busine
ss/global/21dollar.html
However, if China were to be included in
the basket of main global currencies,
economists speculate the addition of the
RMB may replace the British pound sterling
and Japanese yen, in terms of SDR currency
exchanges. Furthermore, as China endeavors
to fix the exchange rate of the US dollar at
one level while the US is simultaneously
starting to intervene in the foreign exchange
market at another level, conflict would be
inevitable.
http://www.politicsforum.org/forum/viewtop
ic.php?f=42&t=133023&p=13763457
http://www.imf.org/external/pubs/ft/survey/s
o/2010/new072910a.htm
http://www.carnegieendowment.org/2010/10
/06/what-happens-if-rmb-is-forced-torevalue/5ij
Questions to Consider
1. What are the strengths and weaknesses of
internationalizing the Chinese RMB, relative
to global financial stability?
2. What constitutes a currency war, and
what can be done to avoid one?
3. Taking into account the political system
of each country, what would the optimal
courses of action be for the participating
countries of IMF?
4. China is an independent geopolitical
power that can resist pressure to change its
exchange-rate policy—how can it be made
motivated to make changes to benefit the
rest of the world? Should it make changes?
Works Cited
http://www.imf.org/external/index.htm
International Monetary Fund (IMF) Website
http://www.imf.org/external/np/fin/tad/exfin
2.aspx?memberKey1=180&date1key=201107-22
http://www.nytimes.com/2010/10/08/busine
ss/global/08currency.html
http://www.youtube.com/watch?v=apGQvU
VZEgU
4