Balance of Payment

A cheaper currency makes it easier to sell one’s goods abroad. A government can make a currency cheaper by buying foreign-denominated assets. For example, China puts downward pressure on the CNY/USD by buying USD-denominated bonds. If we were to think of the (current account) surplus and deficit countries as two companies, what’s happening is akin to seller financing – the seller is lending the buyer money with which to buy goods.

How can selling something cheaply be considered bad for the buyer? Anti-competitive dumping comes to mind – this is where a company sells cheaply in order to drive out the competition and subsequently raise prices. It’s the path-dependence that makes this a difficult situation to evaluate.

There are many catch-22s in economics. Without producers, there can’t be consumers, and without consumers, there can’t be producers.

  • China wants to produce, but waiting for the virtuous cycle of increasing sophistication in productivity and consumer appetites to kick in is too slow.
  • China is a relatively centralized economy, so the state had the option of directly buying products from businesses to boost growth. However, that would result is a lot of waste, as the state doesn’t know what goods people actually want in the future, and would cause the wrong producers to develop.
  • Instead, China pays American consumers to buy goods from Chinese producers. This exerts competitive selectivity while avoiding the problem of having to develop a domestic consumer.

Conclusion: China pays for quality assurance services, forcing its people to compete to sell to foreigners for artificially low prices.

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