Relationship Between US and Chinese Economy: Difference between revisions
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== Background == | == Background (Courtney Weir) == | ||
Since 1978 the Chinese government has been making reforms to its economy. The Chinese government has taken the Soviet style economy to a market-oriented economy and at the same time was careful to stay in the political ideals of the Communist Party of China. The Chinese economy has aspects of both a socialist and communist economy. The two most important parts of the Chinese economy are agriculture and industry, which takes up 70% of the labor force and creates more than 60% of GDP. The Chinese government has allowed small scale enterprises and opened the economy to increased foreign trade and investment, which ultimately has lead to long-run economic growth for China. | Since 1978 the Chinese government has been making reforms to its economy. The Chinese government has taken the Soviet style economy to a market-oriented economy and at the same time was careful to stay in the political ideals of the Communist Party of China. The Chinese economy has aspects of both a socialist and communist economy. The two most important parts of the Chinese economy are agriculture and industry, which takes up 70% of the labor force and creates more than 60% of GDP. The Chinese government has allowed small scale enterprises and opened the economy to increased foreign trade and investment, which ultimately has lead to long-run economic growth for China. | ||
Revision as of 01:08, 21 December 2007
Max Maeder George Mazzoli Courtney Weir Katie Harrington Andy Schachter Marisa Schenkel
Background (Courtney Weir)
Since 1978 the Chinese government has been making reforms to its economy. The Chinese government has taken the Soviet style economy to a market-oriented economy and at the same time was careful to stay in the political ideals of the Communist Party of China. The Chinese economy has aspects of both a socialist and communist economy. The two most important parts of the Chinese economy are agriculture and industry, which takes up 70% of the labor force and creates more than 60% of GDP. The Chinese government has allowed small scale enterprises and opened the economy to increased foreign trade and investment, which ultimately has lead to long-run economic growth for China.
China has a surplus in the rural labor force of 120 million people who migrate to urban areas to work in industrial centers, which drives down wages. Since wages are low in China, the US will continue to buy products made in China, while Chinese consumers buy cheaper products made in their own country. The US is importing more goods than it is exporting, while China is exporting more goods than it is importing, thus leading to a trade deficit.
Since there is a high demand for Chinese products because prices are lower, the investment opportunities by foreign consumers has caused the Chinese economy to grow rapidly. Economists say that GDP is growing at an annual rate of six percent, and by 2030 China will have the second largest economy in the world (China-Window).
Since consumers are receiving cheap goods, foreign businesses are using cheap labor. This is good for China since more Chinese workers have jobs, thus decreasing the unemployment rate. The impoverished people in the US benefit from this trade deficit, since they can buy products they need at cheaper prices. However, US based manufactures and workers lose in this trade deficit, since they have not relocated to China. The hardest hit industry has been the garment industry. The US' trade deficit has reached 725.8 billion dollars, and while in the short run this trade deficit benefits more people than it harms, in the long run everyone will lose (About.com:World News). China will be hurt in the trade deficit when the US consumers stops purchasing goods made in China, and the US will be hurt if China decides to sell government securities, if they decide to sell these, then the US interest rates will skyrocket(About.com:World News).
There are good and bad aspects of the trade relationship between the US and China. Since these two countries have two of the world’s most powerful economies, this trade deficit will have a large impact on the world economy.
Current US Trade Principles (Katie Harrington)
Introduction
The United States currently practices and maintains a fair practice of open-trade, allowing the U.S. to benefit from a broad range of goods and services from countries throughout the world at low prices while preventing inflation. This system also creates “world prosperity” by enabling other countries to profit from economic growth, social stability, and democracy. Each country involved must know the laws and practices of its trading partners in order to promote equal trade. The United States sticks to this policy by allowing other countries to enter its markets if they reduce their own barriers. To protect its own interests however, the United States must make sure that foreign countries either deregulate their industries or make regulations transparent. This ensures that other countries are practicing fair trade, rather than using regulation as a way to indirectly prevent exports from coming into their own markets.
The United States Economy
Economic theory suggests that wealthier countries should lend to poorer countries. The United States has the largest economy in the world, however it is not able to lend to poorer countries for several reasons. While it is able to endure debt more so than other countries, its debt is continuing to rise. Currently, the U.S. holds a gross domestic product of $13.6 trillion, but its external debt has risen by 55% in the past three years. To prevent a recession, the U.S. withdraws cash from its foreign lenders, such as China, in exchange for treasury bonds and other forms of IOU’s. American firms reflect its nations frivolous spending, and have begun to use their extra cash to pay for “buybacks” of their own stock, while the personal-savings rate is negative.
Issues Concerning Electronic Commerce
The introduction of electronic commerce has created a disturbance amongst trading issues for the United States. In 1998, the World Trade Organization declared that countries should not inflict duties on electronic communication, however interference continued. As a result, the United States has come up with an Internet tariff-free zone. This will allow for competitive telecommunications markets while protecting intellectual property throughout the world.
The United States and China
Today, the United States and China hold the most imbalanced bilateral trade relationship in the world. In fact, China accounts for 26% of the United States’ $725.8 billion trade deficit. This is a result of the United States’ overspending for Chinese goods by $202 billion dollars per year. However, if China didn’t lend the United States money, the U.S. would not be able to buy Chinese goods. The imbalance has been the cause of major political disputes within the U.S. Congress, while some believe that the United States is supporting a communist country’s industrialism while thereby destroying its own industrial base. The U.S. trade deficit will prolong as China looks elsewhere for cheaper alternatives to American products and the United States continues to purchase Chinese goods.
Current Chinese Trade Principles (Max Maeder)
Introduction
The Chinese economy has been growing at a furious rate ever since the late 1980’s. This is in large part due to their enormous presence in the world trade market. In 2006, China had already jumped to the 3rd spot in the world merchandise trade ranks, which takes into account both world exports and imports. Chinese economic growth is particularly impressive due to the Asian economic crisis that swept from Korea to Thailand in early 1998. The Chinese government was able to handle matters promptly and with appropriate measures. The government employed monetary policy by buying up large portions of the Chinese stock market. This not only saved their economy from the strong downturn, but the growth they are experiencing only encourages even more foreign investment in the future.
Economic Turnaround
Another major turning point in Chinese economic growth was their admittance into the World Trade Organization (WTO) on December 11, 2001. The largest contributing factor to this breakthrough was the bilateral market access agreement reached between the United States and China in 1999. This agreement states that China will lower tariffs and other trade impediments after they are recognized as a member of the World Trade Organization. As a result of this, average tariff rates on US agricultural products dropped massively from 31% to 14% and on industrial products from 25% to 9%.
Imports, Exports and Trade Deficit
Chinese exports in 2006 were estimated at US$ 963 billion, which places them at third in the world. China’s largest export partners are the US, the EU, Hong Kong and Japan respectively. Surprisingly, WalMart, who is the United States’ largest retailer, is China’s 7th largest export partner. Controversy surrounds the way China handles the value of their currency though. It is commonly believed that a 20% increase in the value of the yuan against the dollar would lead to a 6% decrease in China’s overall GDP (dollar reserves would fall from $450 billion to $350 billion). Economists feel that China is intentionally devaluing the rate of their yuan because by doing so it is cheaper for them to export products abroad as well as to import foreign goods. Also, if the value of the yuan is lowered then more American imports will be sold in China and there will be fewer domestically produced goods sold. In the short run this will create even greater economic growth than they have previously experienced, however; it will catch up to them in the future in a far more harmful way. China has been financing the United States’ debt for years, however; numbers reached a record high last year topping $230 billion. This is due to the fact that the United States is importing far more from China than they are exporting. In 2006, the US only exported a net value of $55,185,000 worth of goods to China whereas they imported a total of $287,774,000 worth of goods from China. The longer China continues to finance the United States’ debt, the larger their ultimate losses will be in the end.
Foreign Investment
Foreign investment in China rose in 2004 despite the fact that the government had been trying to slow down the economy. Interestingly the majority of China’s foreign investors are Asian countries, two of which are in fact run by the PRC (Hong Kong and Macau). The United States ranks fifth in Chinese foreign investment coming in with a total of around $4 billion in 2004. There are several regulations that have kept the US from investing even further in the Chinese economy. First, China demands that no foreign investor can be the majority share holder in any type of investment (China must own at least 51%). The other major issue is that China has yet to protect the intellectual property rights for US products. China experienced record levels of foreign direct investment in 2004 with the numbers totaling $153 billion, which is an increase of one third since the previous year.
Current Issues in the US-China Trade Relationship (George Mazzoli and Andy Schachter)
While both countries want to continue a profitable trade relationship, certain issues need to be dealt with if the relationship is to be continually successful in the long run.
Currency Policy
Since the early 1990's, the value of the Yuan has been held constant by the Chinese government at about 8.25 Yuan/US dollar. This has caused much unrest with the US, as an exchange rate that high causes Chinese exports to the US to be cheaper, while US exports to China are expensive. Some policy makers in the United States speculated that the Chinese government was keeping the Yuan very undervalued so this trade advantage would stay in China's favor. The Chinese government wouldn't want to change the value of their currency because if American exports to China were cheaper, Chinese people would buy those goods instead of domestic goods. However, in 2005, in cooperation with the US' demands China agreed to a 2.1% increase in the value of the Yuan, from 8.28 to 8.11 Yuan/dollar. The Chinese government also made the value of the Yuan more adjustable based on a market of currencies from around the world. While this move was a good start it hasn’t been enough for the US, as the value of the Chinese currency has been decreasing too slowly to make any difference in US-China trading. The US is still having trouble competing with low-cost Chinese imports. Even with the Yuan currently being valued at 7.39/dollar, it hasn’t helped the huge trade deficit that exists.
In regards to the US dollar, the value of it has been way too stable over the past 6 years to make exports cheaper. Since 2002, the value of the dollar has only fallen about 12%. This, along with the lack of devaluation of the Yuan has made a big impact on the trade deficit that exists between the United States and China.
Other economists, however, disagree that revaluation of Chinese currency will help to narrow the trade deficit between China and the United States. The reason that the revaluation (or even tariff changes) won't impact trade flows is because, in general, very little of any such change gets passed through to consumer prices. That's been true of changes in the euro, the yen, the peso and the pound. It would be no different for the Yuan, because consumer prices of most internationally traded goods are largely a reflection of "local value-added," or the costs incurred in the importing market right up to the point of purchase. In the United States, as elsewhere, these costs include labor, rent and utilities, as well as marketing, distribution and transportation -- none of which is affected by international exchange rates. Only the initial component -- the import price -- is affected by exchange rates, and that component is often a small piece of a product's final cost.
Violations of US Intellectual Property Rights
Intellectual Property Rights (IPR) violation has been an issue between the US and China since the late 1980s. Software and DVD pirating as well as other counterfeits including pharmaceuticals, garments, and automobiles are common IPR problems that plague the US-China trade relationship. Piracy in China has grown to mammoth proportions; which is mostly attributed to a lack of IPR regulation from the Chinese government. In fact, China was the number one source of counterfeited goods seized at the US border in 2006, and counterfeits account for about 8% of China’s GDP, and accounted for more than $2.3 billion in lost sales for US firms in 2005 alone.
US Actions
The United States first attempted to counteract the rampant IPR violations in 1991 by threatening to impose a $1.5 billion trade sanction against China if it failed to strengthen its IPR laws and regulations. After failing to enforce these new laws, the US once again threatened trade sanctions in 1995. The same year, the two countries finally reached a trade agreement pledging China to crack down on large-scale producers and distributors of pirated materials. Most recently, the US has initiated a special process under the WTO guidelines to obtain information on Chinese IPR violations. The Chinese government responded by challenging the legal basis for such action, and no real information was gathered.
IPR Violations within China
Despite the fact that China has passed anti-counterfeiting laws, IPR violation is still rampant within China. IPR protection is not enforced by the federal government, but by provincial and municipal governments. This means that these small governments have very little incentive to crack down on piracy and counterfeiting, as IPR violation will often benefit these government leaders monetarily, and individual violators who are in fact caught only face minor penalties. IPR violations such as high tariffs and quotas have also been attributed to hampering US exports. With China’s accession to the WTO, the government agreed to immediately bring the IPR regulations into compliance with the WTO policies. China has in fact made overall great strides improving its US IPR violations. However, it is estimated that 15 and 20% of all products produced in China are counterfeits, and China has a long way before significantly reducing the amount of IPR infringement of US products.
Chinese Acquisition of US Companies
As China becomes more and more of an economic power, a number of US policymakers have raised concern over Chinese efforts to take over US companies. US leaders believe that China does not have a fair play in the international trade policy, as many major Chinese companies are often heavily subsidized by the state. Also, policymakers believe that if certain major US companies are acquired by China, specifically in the energy and oil fields, that it would be detrimental to the trade relationship between the two countries. This is because the US does not want China to have access to the US energy market.
Future Objectives
China is one of the fastest growing economies, but along with great growth comes problems. Chinas greatest problems facing trade with the US are US trademark, patent, and copyright laws. Some may call it piracy, but this is a huge problem within China. In order to overcome this problem the US has many different trade goals which they hope to achieve with China. One of those goals would be to place more US personnel in China in order to cut down on the sale of pirated movies, C.D’s, etc. These new US personnel would work to make sure that China complies with the rules already set forth by the US government under their trade agreement. Border patrol in the imports and exports department would work to make sure that stolen trademarked, copyrighted, or patented items were not leaving China to be sold in other countries and items that had already been bought in China were not leaving the country. A group of individuals whose home base would be China would also be formed in order to monitor potential and ongoing trade problems. An additional future objective of trade with China would be to make sure that the items that are being exported out of China are not impeding on US trade rights. Furthermore the US is looking to trade with other countries which China trades with in order to strengthen China’s already booming economy and to boost US business. Although the US is looking to better its economy, they are also looking to help China’s economy. US officials would work within China to better reforms for its economy. Communication is a key factor in successful trading. The United States would work with high ranking Chinese executives in order to discuss further goals, improvements to be made, and other pertinent information. Different important discussions topics would include talk about how to better the Chinese systems, healthcare options, and much more. The US will also work to bring Chinese commerce up to date with US laws. The United States has lofty goals which they wish to achieve within China. Although there are many different goals to be achieved with time and hard work these integral parts of this well oiled trade machine will run smoothly.
Policies and strategies to reduce trade deficit
In order to help balance the trade deficit the US would need to set forth some new trade rules and laws. One of these laws would definitely include outsourcing. A huge problem that the US has run into with China is outsourcing. US manufacturing companies are moving their businesses overseas to China so that they can pay workers cheaper wages, overwork their employees because of horrible labor standards, have deplorable conditions in factories because there are no laws against it. There are an infinite amount of reasons that US companies are moving their businesses to China. China and the US benefit from this because the Chinese people have jobs and Americans pay low prices for Chinese made goods. Take a look at the clothes you’re wearing, odds are something you’re wearing says “made in China”. In order to help fix the trade deficit the US needs to put forth laws about outsourcing. If American companies do not follow these outsourcing laws their product(s) that are made in China and imported to the US should have a high tax that either the consumer or manufacturer should pay.
Conclusion (Max Maeder)
The debates continue to stir about whether or not the trade deficit is due to China and their stubbornness to alter the value of the yuan. The people that do believe it is in fact China’s fault claim that China is using their undervalued currency in order to gain an advantage in foreign trade markets. Since China is a major importer of US goods, it is vital that we continue to trade in their markets, however; in order to do so we must borrow from abroad in order to finance our desired consumption levels. Economists who believe the trade deficit is China’s fault assume that if the value of the yuan was decreased, Chinese imports would decline substantially.
Chinese officials claim that they are not to blame and the value of the yuan is merely a monetary policy they have employed in order to maintain the stability of the economy. The other option for China is to sell yuan, however; the problem with this is that they have already accumulated foreign exchange reserves totaling roughly $840 billion.
The United States: Congress is threatening to implement a 27% tariff on all Chinese goods if they refuse to reduce the value of the yuan.
There are economists who, in fact, do not believe that China should be blamed for the trade deficit. They claim that recently U.S. bilateral trade deficits have been increasing among countries other than China. Also, the trade balance between the United States and China still only accounts for less than one-quarter of our total deficit to the world.
References
1. "Why the U.S. China Trade Deficit is Unsustainable." About.Com: World News. 2007. A New York Times Company. 29 Nov. 2007 <http://worldnews.about.com/od/china/a/china_trade.htm>.
2. "China Economy Overview." China-Window. 2007. 3 Dec. 2007 <http://www.china-window.com/china_economy/>.
3. http://economics.about.com/od/foreigntrade/a/american_trade.htm
4. http://economics.about.com/od/foreigntrade/a/trade_agenda.htm
5. http://worldnews.about.com/od/china/a/china_trade.htm
7. Little House on the Red Prairie by John Cassidy September 2007 Issue How China is keeping U.S. housing prices booming–for now.
8. http://www.cfr.org/publication/10482/
9. http://usinfo.state.gov/ei/Archive/2006/Apr/14-415253.html
10. http://www.danwei.org/china_information/china_currency_trade_revaluati.php
12. http://www.msnbc.msn.com/id/8654171
13. http://www.uschina.org/statistics/2005foreigninvestment.html
14. http://economics.about.com/od/foreigntrade/a/american_trade.htm
15. http://economics.about.com/od/foreigntrade/a/trade_agenda.htm
