Trade between the U.S. and China


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Trade between the U.S. and China

  1. 1. Trade Between the Eagle and the Dragon:A Comprehensive Analysis of U.S. and Chinese Trade Relations Matthew T. Laidlaw Professor Ahmad Political Economies 02 December 2010
  2. 2. Laidlaw 2Matthew T. LaidlawProfessor AhmadPolitical Economies02 December 2010 Trade between the Eagle and the Dragon The U.S. and Chinese government have experienced a mixed trade relationship.On one hand the U.S. consumer has enjoyed cheap manufactured goods thatcompetitively rival the more expensive goods of the U.S. manufacturers. Yet the U.S. hasalso experienced the negatives associations of higher unemployment brought aboutthrough decreased manufacturing opportunities within the U.S. Along with these twodistinctions, the Chinese and the U.S. have both been strained by the tensions broughtabout during the Cold War as well as the tensions brought about through China’sadoption of Communism during the Post-WWII era. Despite these historical conflicts,U.S. and Chinese trade has expanded rapidly. In fact the two nations have become so interconnected, that either wouldinevitable suffer as the other does. The U.S. has so greatly expanded its role ofglobalization that its economic security is greatly dependent on nations such as China.U.S. economic security has become so dependent on exports to less developed nationsthat in 1978 less developed countries accounted for 29% of all manufactured exports. By1990 this number had risen to 36.4%. Of this percentage of manufacturing exports, ninenations (China, Hong Kong, Korea, Malaysia, Singapore, Thailand, Mexico, Brazil, andTaiwan), accounted for 79% of this growth (Sachs, Shatz, Deardorff, Hall p 1). The Chinese have even greater vested interest in the economic abilities of the
  3. 3. Laidlaw 3U.S.. A large portion of the Chinese economy rests entirely upon the U.S. consumer. Ifthe American consumer suffers as a result of economic events, the Chinese then suffer.If U.S. consumers suffer economically, they in turn purchase less Chinese products.The Chinese have attempted for many years, to create demand within their own nationbut have struggled. As such the U.S. consumer base has appeared as a far more attractivemarket. Growth Since the Cold War Era and China’s Emergence into the WTO In July of 1979, the U.S. and Chinese re-established trade relations by signing abilateral trade agreement. Since the signatures of both nations, the two have seenwidespread trade growth. In 1980 the U.S. signed to give the Chinese Most FavoredNation status. As a result the Chinese began to export massive amounts of manufacturedgoods (Morrison pg 2-6). Since 1979, the Chinese have begun to implement many national reformsincluding trade liberalization and many changes in in order to be recognized by the WorldTrade Organization. During these changes to become a member of the WTO, Chinalowered its tariff rates to 8.9% for industrial goods and 15% for agricultural goods(Morrison 16-18). China also limited agricultural subsidies as well and completely eliminatedsubsidies for exported agricultural products. It granted trade rights to foreign enterprises.It also vowed to treat WTO member nation’s investments with non-discriminatorytreatment. These firms would be treated the same way as a Chinese firm would be. It alsoagreed to the WTO’s intellectual property rights agreements (Morrison 17-18). Predictions of Future Trade Growth
  4. 4. Laidlaw 4 The Chinese economy has seen massive growth rates over the past decades. In1978 total trade in manufacturing goods were roughly $0.5 Billion. By 1990 this numberrose to $17.5 Billion (Sachs, Shatz, Deardorff, Hall p 52-53). And in all trade sectors thenumbers have risen from $5 Billion in 1980 to $409 Billion in 2008 (Morrison p 1). It ispredicted that if current trends continue, U.S. and Chinese trade will grow by 16.1 % ayear (Sachs, Shatz, Deardorff, Hall p 55) Despite this growth, the Chinese economy rests upon the basis of its low wagemanufacturing sector. As a result internal demand remains relatively low and willcontinue to do so without a more direct wage increase. Without wage increases, tradewith the U.S. should continue to rapidly grow. If however the Chinese beings to increase wages to its manufacturing sector, onewould expect to see lower growth rates of trade with the U.S. As wages increase, theprice of manufactured goods also increase. As these prices increase, demand from theU.S. decreases. This possibility of wage increase would however tend to improve internaldemand. As workers make more, they tend to spend more. This model of demand workswell when comparing most Western nations. Despite this example of the West, the Chinese economy does not respond in thesame way. The Chinese economy is built upon low wages as well as high private savings.As workers in China make more money, they tend to save more money. If this money issaved, little demand is created and unemployment rises. It is because of this culturaldistinction between the U.S. and China; that the two economies have become so closelyintertwined together. The Chinese must look to the U.S. for sales and the U.S. must lookto the Chinese for their cheap products.
  5. 5. Laidlaw 5 Despite this dependency the U.S. has attempted to return once again to a moreindependent approach towards Chinese products. Currently the possible adoption of alower currency rate by the U.S., appears to be the largest possible factor leading toslowed trade growth between the U.S. and China. The Chinese have been able tomaintain relatively strong employment rates as well as produce cheap products, partiallyas a result of their artificially low currency rate. It is because of these two emphasizesthat China and the U.S. have so successfully traded and grown more intertwined. Despite this trade growth many politicians are emphasizing reform when dealingwith the Chinese currency rates. As of 2008 the Chinese had a $250 Billion trade surpluswith the U.S. As such many in D.C. are clamoring for economic reform. Many politiciansfell that by either lowering the value of the dollar when compared to the Yuan oreconomically forcing the Chinese to raise the value of their own currency; Chineseexports to the U.S. will decrease. As such demand for U.S. exports will increase as wellas internal demand for U.S. products (Hale, Hale p. 57). This however would create great economic strain on the Chinese and thereforeincur damage to the U.S.. Much of the U.S.’s imports rely upon the Chinese. If the valueof the Yuan increases, Chinese products become more expensive. Many businesses andfactories would suffer if the Chinese products they rely upon increase in price. Many ofthe U.S.’s factories would see increased production and business, but the time it wouldtake to produce the infrastructure needed to remodel our economic system would taketime, time that many businesses do not have. Furthermore the Chinese economy would greatly suffer. Many Chinesecompanies rely upon our current economic model of exchange. As such many of these
  6. 6. Laidlaw 6firms would close. Without these firms many U.S. firms would also lose business as theirChinese consumers lose money. As the value of the Yuan increases to the dollar, U.S. foreign investment in Chinawould also decrease. American investment into China would cost more, as suchexpansion of factories into China would decrease. As a result many U.S. firms wouldhave to decrease expansion projects already established in China as well as lay offworkers. As workers lose their jobs, internal and external demand decreases. Decreaseddemand leads to decreased sales, which leads to decreased manufacturing; which againleads to decreased employment. Both economies are so reliant upon one another thatdestabilization of currency or trade relations, causes severe economic distortion. The Global Financial Crisis The financial crisis of the 2000’s created trade distributions between the U.S. andChina. The financial crisis trimmed the trade deficit of the U.S., yet it has alsoencouraged more intervention from Congress to reform economic policies. As a result of the struggled economy, the U.S. Congress has scrambled to “fix”the problem, as such many senators and representatives have emphasized our dependencyon China as the core of the problem. These congressmen argue that our dependency onChina has created massive outflows of wealth from the U.S. to China, and that thisdependency is the cause of unprecedented Chinese growth rates. This protectionist sentiment has escalated with “Buy America” legislation in therecent stimulus package. This legislation gives biased aid to American companies thatpurchase American made goods; such as tax breaks, subsidies, etc. This legislation hasalso created tense trade relations with the Chinese, who have crafted their own “Buy
  7. 7. Laidlaw 7China” legislation in their own stimulus bill. This in turn has hurt many Americancompanies in the same way “Buy American” legislation hurt the Chinese. The argument made by “Buy American” legislatures, seems to be that we havegrown to dependent on the Chinese. As such many believe the current crisis could havebeen avoided, had the U.S. not been so dependent on the Chinese. Many believe that theChinese have made massive profits and therefore been able to create massive growth onthe grounds of economic struggles of the U.S. (Prasad 2009). The problem with this argument is however; the fact that China has also struggledgreatly due to the current financial crisis. The Chinese economy relies upon its exports.Without expanded exports, China will be unable to maintain its growth. When its tradepartners struggle, just as the U.S. and most of the world has; China’s exports decrease,because foreign costumers cannot afford them. China has so much vested foreign investment in the states, that any economicfailings in the U.S., also harms the Chinese; and vice versa for U.S. foreign investmentsin China. The current protectionist sentiments growing as a result of the financial crisisonly act as counter-productive, as business stability between the nations becomesinterrupted. Companies throughout both nations cannot grow if they doubt their abilitiesto expand in a market, because of local governmental aid to their competitor(s). It has even been argued that the current financial crisis was directly caused by thegrowing protectionist sentiments of the U.S. and China. As nations with huge deficitssuch as the U.S. began to borrow from nations such as China, Asian consumers savedtheir money out of fear of failure in foreign or direct domestic investments. These“savers” feared that as a result of protectionist aid in invested nations deficit nations, that
  8. 8. Laidlaw 8they would lose their investments. Because of this fear these prior investors becamesavers and did not spend money as they had, but instead saved massive amounts ofmoney. Most of these lender Asian nations did not have the financial market capabilitiesof the West, such as banks and lending centers. As such the money became pooled inU.S.’s established financial sector and U.S. banks. These U.S. banks in turn receivedhuge amounts of money from Asian savers. These banks had huge amounts of money and were able to give out lots of loans atrelatively low interest rates. This created a situation in which consumers saved littlemoney and loans were more easily given to unstable borrowers. These borrowers wereunable to pay back their loans. In turn these firms were unable to withstand the massiveoutflows of money that ensued and these huge financial centers collapsed. Had protectionist sentiments been avoided, it is believed that these Asian lendingnations would have instead “spent” their money rather than saved it. In turn the moneywould have been invested in the market or domestic growth, as well as direct foreigninvestment through business transactions rather than bank lending. U.S. Deficits and Chinese Trade Surpluses Another point of trade contention between the U.S. and China has become theU.S.’s rising financial deficient. As of 2008 Chinese holdings of U.S. Treasury Securitiesfell around $700 Billion. This deficient is further increased when Chinese holdings inU.S. aided third world counties are compounded. In truth the U.S. actually owes another$150-200 Billion to China; based upon its promises of aid to developing nations (Prasad2009). This deficient has further sparked protectionist sentiments by U.S. citizens. It has
  9. 9. Laidlaw 9also given the Chinese unprecedented influence over U.S. policy decisions. The U.S.must be cautious in the policy decisions it makes while the deficit is so heavily controlledby the Chinese. These “cautions” must extend to U.S. policy when dealing with thepossibility of undervaluing the dollar when compared to the Yuan as well as U.S.protectionist legislation. The U.S. and Chinese Future Energy Crisis The Chinese have grown at unprecedented rates over the past few decades sincethe Cold war Era. As a result the Chinese have placed greater strain on not only productcompetition with the U.S., but also energy allocation and finite resources. These finiteresources include materials such as copper, nickel, iron and aluminum; as well as fossilfuels such as oil and natural gas. The Chinese need vast amounts of these resources and the need only becomesgreater every year. In 1990 China accounted for 7% of the worlds copper, nickel, iron,and aluminum needs. By 2000 the accounted for over 15%. Today that need has grown toover 20% and it is predicted to increase by at least double within the coming decade. TheChinese have also been large importers of oil. As of 2004 the Chinese accounted for 31% of global energy demands and this need has only continued to grow (Zweig,Jianhaip25-26). As a result of this growth it has become increasingly more important for the worldto regulate China’s economic impact. It also means that it has become increasinglydifficult for U.S. companies to bargain for the same finite resources. The demand hasgrown on these resources as such so has the price. This demand becomes increasinglymore difficult to achieve as the resource stocks dwindle as all finite energies do.
  10. 10. Laidlaw 10 As such conflict between the U.S. and China on energy reform, becomesinevitable. As both nations compete for the same resources tensions rise and economicgrowth rates face risk. This possibility becomes even more compounded for the U.S.when the policy decisions the U.S. makes must be weighed alongside the rising deficitdecisions. This lack of energy resources also places the U.S. in stark national securitypossibilities. How can the U.S. sustain military strength and protection; when resourcesbecome thin and economic troubles arise? Furthermore, how can the U.S. attain nationalinterests, if so much of the U.S. economy is bounded by foreign entities such as theChinese? Conflict seems inevitable, unless the U.S. and Chinese can achieve trade policiesthat not only benefit both, but also begin to work towards “green” possibilities. TheChinese government has made large bounds in the area of “green” technology; as suchthey appear to be on the cutting edge when it comes to possible future trade capabilities. Currently China has been on the cutting edge in wind technology. From2006-2009, China was able to consecutively double their wind turbine output of thenation every single consecutive year. It is also predicted that if the Chinese continue theseinvestments, the nation could be the largest supplier of wind energy in the world, as wellas the largest supplier of wind based energy technology (Chinas wind-power potential p1). This investment in renewable energy could give the Chinese economy unprecedentedcompetitiveness over the U.S. in terms of energy capabilities, unless the U.S. is able toalso reform its sustainable energy capabilities. Despite the possible abilities created through “green” energy, by the Chinese
  11. 11. Laidlaw 11government; trade relations have become strained. The Chinese have passed legislativepractices that only implement “green” technology if the company that produced it is 51%or more Chinese own. As a result of this legislation many nations feel that the Chinese have violated thecharters of the WTO as well diminished the capabilities of the Kyoto Treaty. The Chinesehave a possibility of creating vast amounts of “green” technology which they can in turnexport to the rest of the world. Despite this they may in turn create a situation throughwhich their own protectionist sentiments stir protectionism in other nations; including theU.S. If this is the case, China may lose out on exporting their “green” technology to othernations (Chinas Wind-Power Potential p 1). In order to continue to compete with the Chinese, the U.S. must start to investmore heavily in alternative fuels and “green” technology. If finite fuels continue todeplete, these alternatives will be necessary. If the U.S. waits until an energy” crisis, thenthe Chinese will have a huge economic and competitive advantage. “Green” technologywill be the future of economic growth. Without this competitive advantage the U.S. willstruggle in all sectors of the economy. Finite fuels will become more expensive, as suchso will products. Whereas a renewable energy based economy will be able to limit risingprices as they will rely far less on finite fuels. Furthermore the nations that becomerenewable based energy economies will be able to sell their excess energy capabilitiesacross the world and make huge profits. These economies will also be the driving forcebehind future globalization policy, as other nations rely upon their nation’s strengths. Conclusion The U.S. and China both gain from the trade growth exhibited in both nations. As
  12. 12. Laidlaw 12such both nations should avoid legislation and policy decisions that lead to protectionistsentiments. These sentiments only discourage competition and instead create stagnation,inefficiency of the market, increased product prices, and market instability. Instead both nations should encourage a free market enterprise that works tocreate competition among Chinese and American firms. The U.S. should encouragepolicies that make the U.S. a more competitive nation rather than create protectionistpolicies. Invest in domestic education to make the American worker more competitive.Invest in infrastructure to make the U.S. more appealing to companies and MultinationalCorporations. Invest in renewable energy programs that encourage a more efficientenergy system as well as market stability as these resources remain more constant thantheir finite counterparts. The Chinese should also pursue these same policies. They should work tomaintain strong relations with the U.S., in order to encourage export growths. Theyshould also continue to encourage internal demand as a way to not only stabilize theirown market systems, but also encourage more foreign investment as companies look topursue Chinese consumers. The Chinese and the U.S. should both discourage lowering the value of the dollarcompared to the Yuan. As this would only create market stability and aggravate traderelations. This would also create further hostility with the Chinese in the discussion of theU.S. financial deficit. The stability of the U.S. and Chinese trade market only creates growth andprosperity for both nations. Any change in this stability would only create challenges forboth U.S. and Chinese firms, as such protectionist legislation should be avoided above all
  13. 13. Laidlaw 13other pursued trade policy.
  14. 14. Laidlaw 14 Bibliography Anonymous, . "Chinas wind-power potential. " Nature 457.7228 (2009):357-357. Research Library, ProQuest. Web. 27 Nov. 2010 Hale, David, and Hale, Lyric. “Reconsidering Revaluation: The Wrong Approachto U.S. Chinese Trade Imbalance.” Foreign Affairs (2008): 57 Jeffrey D. Sachs; Howard J. Shatz; Alan Deardorff; Robert E. Hall. “Trade andJobs in U.S. Manufacturing.” Brookings Papers on Economic Activity, Vol. 1994, No. 1.(1994), pp. 1-84. Morrison, Wayne. “China-U.S. Trade Issues.” Congressional Research Service(2010), Summary pp. P 2, 12, 14-22. Prasad, Eswar. “Effect of the Financial Crisis on the U.S.-China EconomicRelationship.” Cato Journal (2009) Zweig, David, and Bi Jianhai. "Chinas Global Hunt." Council on ForeignRelations 84.5 (2005): 25-38