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 US Trade Principles
Current Chinese Trade Principles
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
Currency
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
Chinese Businesses
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 or item that had already been bought in China. A group of individuals whose home base will be China will also be formed in order to monitor potential and ongoing trade problems.
Conclusion
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
