Mark Thoma covers the recent renewal of Senators Schumer and Graham's call for a tariff against Chinese imports. Somehow they think taxing ourselves 27% will get the point across to the Chinese. What? They argue that the Chinese fixing their currency is a violation of free trade. So they feel we should then further sacrifice free trade? I thought an eye for an eye leave you both blind?
But Mankiw points out that fixed exchange rates are not inconsistent with free trade.
Here is a question for the Senators to ponder: How do New York and South Carolina manage to have free trade between them? There is no floating exchange rate to bring interstate trade flows into equilibrium. By using a common currency, the two states effectively have a fixed exchange rate, and somehow everything works out just fine. David Hume explained why.
And according to Menzie the prospect is for the dollar is that it will likely continue to depreciate, making a yuan devaluation vis a vis the dollar much more diffiuclt to engineer.
Keywords: Exchange Rates, ECO120