Relationship Between US and Chinese Economy

Background (Courtney)

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 government has shifted the agricultural work to a system of household responsibility, they have increased the power of local officials in the industry, 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. 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 poor 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 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. 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. 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)

American Trade Principles and Practice -The United States practices a system of “open trade subject to the rule of law.” Engagement in world trade helps keep prices down on a broad choice of goods, thus reducing pressures from inflation. -Free trade gives other nations a competitive advantage as well, allowing them to produce goods and services, which may prosper from a specific resource or skill. This increases the productive capacity throughout the world. Other benefits to other countries by promoting economic growth, social stability, and democracy , while promoting “world prosperity, the rule of law, and peace in international relations.” -In order for an open trading system to work, it is necessary that countries practice “fair and nondiscriminatory access to each others markets.” The United States adheres to this by allowing countries access to its markets if they reduce their trade barriers through a multilateral or bilateral agreement. It is only fair if every nation is aware of each others trade laws and practices in order to permit everyone an equal chance to compete. -To protect its own interest, the United States plays an active role in ensuring that foreign countries deregulate their industries or otherwise make regulations transparent to prevent inequality against other foreign companies, as well as to maintain international practices. By doing so, the United States prevents other countries from using regulation unfairly by indirectly keeping exports from coming into their markets.

Current U.S. Trade Agenda - The introduction of electronic commerce has created a disturbance amongst trade issues. Even after the World Trade Organization declared that “countries should not interfere with electronic commerce by imposing duties on electronic transmissions,” there still remains a problem. - In an attempt to guarantee “competitive telecommunications markets” around the world, as well as to establish protection for “intellectual property in digital products” around the world, the United States has introduced an Internet tariff-free zone. -The United States government would also like to reduce trade barriers affecting agricultural products, as well as to liberalize trade in services, further reduce tariff and nontariff trade barriers for industrial goods, and establish international labor standards.

-Currently, the United States and China hold the most imbalanced bilateral trade relationship in the world. Each year the United States imports more goods from China than it exports by $202 billion dollars each year. -China accounts for 26% of the United States’ $725.8 billion trade defecit. -This is an example of vendor financing. China lends the U.S. money to buy Chinese goods. -This imbalance has been the cause of major political disputes within the U.S. Congress. Some believe that the U.S. is “destroying its industrial base to support a communist country’s industriatilisation.” -The United States purchasing of Chinese goods will continue as long as wages are low. Meanwhile, China will look elsewhere for cheaper alternatives to American products, therefore prolonging the U.S. trade deficit.

Little House on the Red Prairie by John Cassidy September 2007 Issue How China is keeping U.S. housing prices booming–for now.

How can America withstand the trade defecit? -Because the United States has the largest economy in the world, it is able to withstand debt more so than other countries. However, though its gross domestic product is $13.6 trillion, its external debt has risen by 55% in the past three years. -While most countries would face recession if faced with such economic conditions, the U.S. has been able to withdraw cash from the Chinese Government, as well as other lenders abroad. Treasury bonds and other forms of IOU’s are handed out in return. -Economic theory suggests that, “wealthier countries should provide capital to poorer ones, because that’s where the highest potential returns are.” However, because the federal government is running a defecit, the personal-savings rate is negative, and American firms are using their surplus cash to finance “buybacks” of their stock, the U.S. doesn’t have enough savings to lend to poorer countries.

References

"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>.

"China Economy Overview." China-Window. 2007. 3 Dec. 2007 <http://www.china-window.com/china_economy/>.

"Economy of the People's Republic of China." Wikipedia. 2007. 3 Dec. 2007 <http://en.wikipedia.org/wiki/Economy_of_the_People%27s_Republic_of_China>.