Relationship Between US and Chinese Economy

Background

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 (Wikipedia). 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 (Wikipedia), 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 trade deficit has reached 725.8 billion dollars (About.com:World News), 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 Chinese Trade Principles (Max)

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%.

Exports, Imports 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. China has been financing the United States’ debt for years, however; numbers reached a record high last year topping $230 billion. 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).

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/>.

http://economics.about.com/od/foreigntrade/a/american_trade.htm

http://economics.about.com/od/foreigntrade/a/trade_agenda.htm

http://worldnews.about.com/od/china/a/china_trade.htm

http://www.portfolio.com/news-markets/national-news/portfolio/2007/08/13/Housing-and-China-Policy/?TID=rm/goo/What_We_Owe_China/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.