Is trade with China a form of appeasement?

A question from Yahoo! Answers:

Is trade with China a form of appeasement or paid tribute since they do not buy our goods or revalue currency?

Neither. Bank of China buys large quantities of U.S. government bonds, thereby helping to keep U.S. interest rates low and contributing to the expansion of home ownership in the U.S.

Also, recall that U.S. consulates in China have recently toughened visa requirements for business visitors; as a result, it is much more difficult for a Chinese business person to get a visa to go to the U.S. compared to a visa to go to Japan, Australia, or Europe. As a result, buying from the U.S. is severely impeded.

As to valuation of the currency, the yuan may well be overvalued. A fair relative valuation of two currencies is one that prevails in a free market when both countries are in external equilibrium (i.e., maintain a near-zero trade balance) and in internal equilibrium (i.e., unemployment is at a non-inflation-accelerating level). U.S. and China are clearly in an external disequilibrium (U.S. has a trade deficit, China, a trade surplus), so many people notice it and hasten to conclude that the yuan must be undervalued. What they don’t realize is that China has an enormous frictional unemployment problem. Every year, millions and millions of people move from the countryside into the cities, where they have a mighty hard time trying to make a living. Large unemployment would suggest that the currency is in fact overvalued…

Finally, inflation in China in recent years has been substantially higher than in the U.S., suggesting that the yuan is indeed overvalued…

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