Blog #3

   Does China have a Monetary Advantage over the United States?

In his article “The International Monetary System: Diffusion and Ambiguity,” author Benjamin Cohen introduces the concept of China having a monetary advantage in the global marketplace. Cohen introduces this idea by stating, “Influence might be increased directly through the use of newly acquired reserve stockpiles to threaten manipulation of the value of stability of a key currency such as the dollar. There is nothing complicated about this option.” The manner in which China could take advantage of the United States in this scenario would be simply by refusing to add American dollars to Chinese reserves for the future. Currently, China’s reserves hold roughly 3.25 trillion dollars of American currency. Foreign exchange reserves are an extremely important aspect of a country’s stability, and outreach, they provide balance, and a sense of stabilization for any given economy. What Cohen is theorizing, is that China could stand to benefit from removing US dollars from its reserves, in essence, sending the US dollar value plunging. However, Cohen also provides a rebuttal to this daunting scenario, “Dollar depreciation would greatly erode the competitiveness of the exports that are so vital to China’s economic growth. In reality, currency manipulation is a two-edged sword that could end up doing China far more harm than good - a kind of nuclear option, to be used only in extremis.” This would not only disrupt both countries’ economies and GDP, but the repercussions could also have a ripple effect, negatively affecting global trade and marketplaces.

Given these arguments from Cohen, we now must ask ourselves the question of, would China ever realistically follow through with this? As of right now, that answer is no, but certain scenarios could possibly develop that could threaten the monetary balance we see today between the two nations. An extremely polarizing situation occurred between the US and China in 2018, under the presidency of Donald Trump. Trump had repeatedly accused China of manipulating its currency, the Chinese yuan, to increase its exports, and GDP. This caused Trump to issue tariffs against Chinese imports to the United States. In response, China also launched its own set of tariffs against US imports, ultimately resulting in somewhat of a stalemate. American lawmaker have also been vying for a sort of “revaluation” of the yuan. In the past decade or so China has in fact been manipulating the yuan, and a manner in which this is done is by increasing its foreign currency reserves. Theoretically, If China (which they never would) were to reevaluate the yuan to “equilibrium,” then US GDP would increase by 1.9%, or 285.7 billion dollars, creating 2.25 million new jobs. 

Although, yes, China has an inherent monetary advantage over the United States, they would never act upon it. The amount of disruption that would be created between not only the US and China, but the rest of the world’s economies would be extremely detrimental, to the point of an entire global economic collapse. It is comparative to “Mutually Assured Destruction,” a term normally associated with the use of nuclear weapons, is applicable in this scenario.