Abstract

China is the United States’ second largest trading partner, with trade between the two countries rising from $5billion in 1981 to $ 536 billion in 2012. However, the two countries are involved a trade dispute regardingChina’s refusal to appreciate the RMB. The undervaluation of RMB has affected US manufacturing firmsespecially in the textile industry. China exports textiles to the US at lower prices than US textiles in thedomestic market. This has led to shutdown of US textile firms and job losses in the sector. China has acompetitive advantage over the US in the textile industry because of cheap labor, economies of scope and scaleand abundant labor supply. The US argues that if China allows RMB to appreciate, this will mean that the pricesof Chinese exports to the US will rise. This will reduce the US China trade deficit. The appreciation of RMB toUS dollar will increase the prices of US Textile exports to the US. The purpose of the paper is to analyze therelationship between RMB to the US Dollar and prices of US Textile exports.

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