Trade Imbalances and Trade Disequilibrium

When the U.S treasury secretary Tom Geithner accused the Chinese government for manipulating the yuan, the Chinese government responded negatively. Barack Obama imposed 15% tier tariff on Chinese products, free trade started struggling. The free trade proponent government started protectionism and trade war.

What are the impacts of the undervalued yuan on global economy? Generally, the Chinese economic growth heavily depends on exports, and it has several advantages: lower wages, manufacturers have easier access to loans, yuan is undervalued.

The greatest advantage of the Chinese companies is undervalued currency, meaning Chinese products are cheaper and more competitive in global markets. The government has the largest trade surplus with the U.S.

The Chinese government heavily invested in T-bills, because abroad earned foreign currency appreciates local currency once it brought to China and converted to yuan. The amount of the yuan would decrease and value would increase, this will eliminate competitive advantage of Chinese products overseas.

Currently, the Chinese government holds around $800 billion T-bills, and it's providing fund to the U.S government to finance it's deficit. If the U.S makes pressure to China to appreciate the yuan against dollar, what would be the consequences? Who is holding over whom, China or the U.S.

In this case, the U.S is winner. Assume, if China decides to dump its T-bills, it would depreciate the dollar and China will be the loser. In addition, the Federal Reserve of U.S can just buy them and hold, it would depreciate the dollar, again China will loose the game.