Does Increase Trade Between the U.S. and China Benefits Both Countries International Trade Economic - Essay Example

Lecturer INCREASED TRADE BETWEEN U.S. AND CHINA BENEFITS BOTH COUNTRIES (INTERNATIONAL TRADE ECONOMIC) Though Chinais still by and large a developing country, when one looks at the trade between the country and the United States, one will be shocked to find that the balance of trade is actually in favor of China. Actually, the trade deficit is so large that every sensible US politician must address the issue. Some have pointed out that the reason why China enjoys such a large trade deficit with the US is because of the artificially low valuation of the Chinese currency, the Yuan. The Yuan has indeed marginally appreciated in recent years but still many US law makers cite that this rise hardly reflects the reality. Since it’s cheaper to produce goods abroad, many US companies have outsourced cheap jobs abroad, thereby compounding the unemployment problem in the US- but would protectionism really address the large trade deficit between the US and China? Would China retaliate by refusing to invest in US government bonds, thereby destroying what has hitherto been the largest venture capital partnership in the world?. This paper gives an insight on the trade between US and China; it provides import and export figures as well as, benefits and protectionism of this partnership to both countries. Introduction: In the past there has been a deficit in trade between US and China. According to (Milton 13), it is claimed that this deficit is as result of unfair trade practiced by China by purposely undervaluing its currency. When China undervalue its currency, then automatically its products become less expensive in the market, thus increasing China’s export proceeds and making a trade surplus. This creates un-conducive business environment that makes it difficult for other countries to trade in including United States of America. Economists pose a challenge whether undervaluing of the renminbi is the real cause of the trade imbalance between US and China? Indeed, china’s low pay wage has made china goods cheaper due to low cost of production but this is considered unfair to US The increase in trade deficit between of China and America’s has increased pressure to both countries thus most conservatives suggest that US should stop trade with China, and move all the outlet manufactories from China back to America ( Chaffer et al 23). However, they seem to have forgotten a very important tenet that has served for the last half century, the foundation of global economic development which meant trade is good. Global trade isn’t a new phenomenon. It has ebbed and flowed as long as history has been recorded. The principle has always been the same: one group of people has something that another group wants, and is willing to give it up in exchange for something that the other group has (Milton 13). It’s a mutually beneficial which is not exception with the trade between U.S. and China in the long run. While all countries seek to engage with others have important roles to play in the future of world trade, it is important for United States and China both to decrease protectionism and forge on how to integrate into future global society.. 2 How U.S has benefitted from this trade There are a number of benefits US has gained from this trade partnership. In 2001, China joined the World Trade Organization (WTO) and since then, as a member of the WTO, China has reduced or removed many of its earlier barriers to trade and investment. The liberalization of Chinas trade regime has meant a vast increase in the opportunities for U.S. exporter and its internal economic. U.S. has gained advantage of this in four categories: 1) With the increasing consumption ability of Chinese customers, U.S. exports more and more products to China. 2) As a result of entering into Chinese market, U.S. headquartered multinational corporations expanded their markets and gained more profits. 3) Increasing trade with China helps U.S. to create trade-related high quality jobs. All the above gains have facilitated the development of U.S. economics. 2.1 How U.S exportation to China benefitted U.S economic GDP per capita is often considered an indicator of a country’s standard of living. It is often used as such an indicator, on the rationale that all citizens would benefit from their country’s increased economic production. GDP is determined by private consuming, gross investment, government spending, exports, and imports. Therefore, the more the country gains from the export the more GDP growing. That’s why we can reflect on the extent of benefit America gains by exporting to China (retrieved fromhttp://www.usatoday.com/money/world/story/2011-08-24/Buy-Made-in-China-goods-Benefits-to-US-may-surprise-you/50127452/1 on 14/11/2011). China remains the third largest export market for American made products, behind Canada and Mexico. In 2009 alone U.S. exported to China a total of $69.6 billion and this figures rise to $90.7 billion when U.S. exports to Hong Kong are included. Indeed, Trade makes the people in China more prosperous, so they purchase more high quality imported goods and services. Trade with China is growing very fast. U.S. exports to China have been upscale of about 330 percent since 2000 (Leontief 45). In comparison, U.S. exports to the rest of the world during this period grew just 29 percent. Even in recent global economic downturn, U.S. exports to China outperformed during the 2009 and were at about the same level as in 2008. Meanwhile, exports to the rest of the world shrank by just under 20 percent during the same period. Despite recession, almost half of the U.S. states showed increases in exports to China in 2009. Nineteen states exported more than $1 billion to China in 2009 2.2 How the U.S multinational corporation gained from trading with China Trade with China helps U.S. based multinational corporations expand their markets and gain more profits. From Microsoft, Motorola to Wal-Mart and Mcdonalds, there are a number of American-origin multinational companies that trade with China that gained more profits, and expanded into new markets (Leontief 59) between 2004 and 2006 alone, the number of foreign-funded enterprises in China increased 470,000 to more than 500,000. In recent years, however, most established foreign multinational corporations have enjoyed strong revenue growth and profitability by riding on the back of China’s spectacular economic growth. As per IBM Global Business Services study, China already contributes on average nearly ten percent of global revenues of 180 multinational corporations. At the same time, in 2006, the American Chamber of Commerce in Shanghai reported that 64 percent of its member companies were profitable and 65 percent had profit levels in China equal to or higher than in other countries Most U.S. based multinational corporations provide services to China. Many of these services are sent directly to China from the United States, and some are sold in China by the foreign affiliates of U.S. firms. Due to cross-border exports of U.S. services have increased, these foreign affiliates account for the most significant growth in services exports to China. These include branches, franchises, and other affiliates. Chinese laws and regulations had prohibited or discouraged the establishment of such branches in many industries, but those rules were significantly liberalized in the WTO-accession commitments (Chaffer et al 56). These sales have quickly grown to around one-third of U.S. services exports to China. As of 2003, the United States exported six billion worth of services to China on a cross-border basis, and exported another $3.8 billion in services by way of these foreign affiliates, while Cross-border exports alone increased by 20.5% in 2004. The U.S. Department of Commerce does not provide industry-level data on sales of services by these foreign affiliates. Because these numbers are not capturing the transactions that are being conducted in the fastest-growing segment of U.S. exports of services, they tend to underestimate the level of U.S. exports, and hence the magnitude of the U.S. surplus, in many of these sectors ( Leontief 71). The available data nonetheless underline the point that in most private services, the level of U.S. exports to China is far in excess of U.S. imports from China. Even when these foreign affiliates’ sales are excluded, the United States exported $11.30 in services to China for every $1 in services that it imported from that country in 2004. Research from the Federal Reserve Bank of San Francisco shows that for every dollar spent on a China-made item, 55 cents go to U.S. businesses for services such as marketing and sales. Last year, 2.7% of U.S. consumer spending went to products made in China, according to the study. 2.3 Trading with China create more high quality jobs in U.S Basing on International trade countries’ demand curve, China is developing country which needs to study more high technology from America. America as a developed country has the absolute advantage in high technology compare to China. Absolute advantage is contrasted with the concept of comparative advantage which refers to the ability to produce a particular good at a lower opportunity cost. Because of this China need to import high technology from America to help it’s development, during its trade with China, America export the high technology products as well as higher education labors which can help create more higher-level jobs. Most trade-related jobs were created in the U.S. because of the increasing activities emanating from its trade with China. Top product exports to China overall were computers and electronic, agricultural products, chemicals, and transportation equipment. These exports facilitate the creation more of higher-quality jobs in the U.S. While economic integration may lead to job losses in the short-term, in the long run a great number of higher-quality jobs are created as a result of the integration. Currently, there is no specific data for export related job creation to China. The following data used in this paper is the total export-related job creation in the U.S. But China as the third largest U.S. export destination country counts for certain amount of the total number. In 2008, U.S. exports supported more than ten million full-time and part-time jobs. The upward growth of trade in an expanding global market holds great opportunities for U.S. based global trade related job creation. The importance of exports and trade in the U.S. economy was accelerating during the past seven years, but was interrupted by the economic downturn that began in December 2007. Because of weak global economy, exports and export-supported jobs dropped sharply through the first half of 2009; however, they began to recover in the second half. Government and private-sector economists expect that the recovery in exports will continue in 2010 and beyond, which will increase the opportunities for U.S. businesses to grow. Exports of goods and services supported 10.3 million jobs in 2008. This accounted for 6.9 percent of total U.S. employment in 2008. The value of total exports, as measured in this study, totaled nearly $1.7 trillion—or nearly $165,000 per export job in 2008. Exports of goods and services supported a record 10.3 million jobs in 2008. The number of jobs supported by exports has been increasing since 2003, when exports supported 7.6 million jobs. The value of exports per job was $165,000 in 2008. This ratio has trended steadily up since 2002, growing 5.9 percent per year from 2002 to 2008. The ratio began to accelerate in 2001. More than half of the 10.3 million jobs supported by exports in 2008 occurred in two industries: (Milton 13) manufacturing and (b) professional or business services. Export-supported manufacturing jobs totaled nearly 3.7 million, or 36 percent of the total jobs supported by exports. Export-supported jobs in professional and business services totaled nearly 2.1 million, or 20 percent of the total. Exports also accounted for significant shares of employment within transport and warehousing - about 23 percent, agriculture - about19 percent, and wholesale trade - about 17 percent How trade with U.S. benefitted China: As we all know, China gains many benefits from trading with U.S.First of all, direct and indirect investments from U.S. companies to China increased financial power of China. Because the overall trade balance of a country equals domestic saving minus domestic investment, the normal expectation is that low-income countries that have high rates of return to investments (e.g. China) should be borrowing from abroad to finance their development. However, since 1994, China has been running an overall trade surplus that is growing over time. This counter-intuitive phenomenon of a low-income China that is extending loans to the outside world has strengthened the impression of mercantilist China intent to focus on export promotion (Nayler 33). This impression has its origin in the great extent that China has increased its penetration of the US market over the last decade. Of the 34 categories of manufactured goods imported by the US, China was among the top 5 suppliers in 9 categories in 1995, up from 1 category in 1990 and none in 1985. Besides, with the injection of the funds, many projects that couldn’t be completed before due to the lack of financial support were accomplished. For example, with the establishment of Microsoft China, each year, many educational supportive projects are created and well-maintained in mainland China. These projects helped many local students to access more scholarships or to get higher education’s in developed countries. Secondly, the technology and patient transfers increase the development of many local Chinese industries. Many local Chinese firms are not capable of producing high tech equipments, and rather, they finds a way to corporate with a U.S. company and either purchase patients or share profits to produce desired products to local customers. For example, TLC is a Chinese firm that produces electronics. One of its recent products is HDTV. Although this product is popular in local Chinese market, TCL is not capable of producing the CPU of its HDTV. Rather, it is purchased aboard. Thirdly, Trade with U.S. increase the employment rate of many areas in China. The expansion of U.S multinational corporations lead to the development of many world-class manufacturing centers in China (Chaffer 67). These manufacturing centers usually located near the export zones in eastern seaside cities. Many Chinese workers move from their hometown in poorer area in inner land China move to work for these manufacturing centers. As a result, many previous unemployed people found jobs in these centers. Besides, new technology, equipment, and management expertise increase the overall Chinese production power. Chinese production power has been increasing most of the years during the past thirty year since 1980. Nowadays, it is one of the biggest manufacturing production countries in the world. Current protectionism of trade between U.S. and China It is common for trading partner countries to protect their own industries. A number of methods can be used to increase the protectionism, which includes import substitution, export promotion, tariffs, non-tariff barriers, quotas, and many others (Carmel el ta 99). This protectionism usually cause imbalance of trade and tensions between trading partners, and sometimes, it can even lead to trade wars. There is no exception between U.S. and China in terms of protectionism. Recently, U.S. passed legislation aimed at Chinas management of its currency. For years, as the Chinese exported goods to the U.S, they were paid in dollars, which they have invested in U.S. Treasury bills. But rather than let the market decide the yuans value, China kept it at a level that U.S. administrations have deemed artificially low. This helps Chinese exports remain competitive and makes U.S. goods in China more expensive. According to New York Times, in late September, China increased its tariffs on poultry imports from the US from 31.4 percent to 105.4 percent. The Chinese had started their investigation into US poultry prices almost immediately after the Obama administration a year ago had imposed heavy tariffs on Chinese tires. The cost of protectionism and the alternative of protectionism Protectionism can help to protect a countrys own industry in the short run, but there is always a cost associated with it. For example, many people think that accepts that protectionism can increase American jobs, but not everyone knows the cost of it. A study from the Federal Reserve Bank of Dallas shows that the cost to the economy from protectionist policies runs to a hundred billion a year in higher prices for goods (Theodore 55). For example, the study shows that tariffs saved 226 jobs in the luggage industry at a cost of $1,285,078 per job saved, some 605 jobs in softwood lumber at a cost of $1,044,271 per job, and 168,786 jobs in apparel and textiles at a cost of $199,241 per job. Since there is always a cost associated with protectionism, is there another way to protect the overall trade balance. Yes, one way is to focus on increasing the saving rate and reducing the spending. China used this as an alternative method to protect its current account. According to a study by National Bureau of Economic Research, protectionism can influence the overall trade balance only if it can modify saving-investment behavior in the economy; the major cause of China’s current account surplus is its high household saving rate. The high saving rate is, inturn, generated by China’s demographic profile, the absence of social insurance for the bulk of the population, and the post-1978 appearance of investment-motivated saving in response to the scarcity of formal financial intermediation to finance the investment of the non-state sector. The formula they use to calculate the current account of a country is CA = (S – I) private + (S - I) SOE + (S - I) govt. According to the formula, any structural factor that increases S private without increasing I private correspondingly would raise CA. This is the situation in China after the initiation of economic deregulation in 1978. Past central planning, closure to international trade, and promotion of local self sufficiency created many highly profitable production niches and arbitrage possibilities, but private businesses cannot undertake the required investment immediately because they cannot get loans either from the wholly state-owned banking monopoly or from off-shore foreign financial institutions (Theodore 49). Because the state banks do not channel much of the private savings to private investors, the only way that a private Chinese businessman can invest is to accumulate enough savings to start his own workshop-factory. This is a feasible option because the threshold size for the average Chinese enterprise is small. In an economy that is open to trade but closed to private capital movements, the failure of the domestic banks to match the available private saving flow with desired private investment creates the twin phenomena of a high private saving rate, and a persistent CA surplus. Also from their study, investment-motivated saving is only one of the important factors behind China’s high household saving rate. Two other important factors are the low coverage of social insurance Programs and the demographic profile of the population (Nayler 74). The absence of pensions and medical insurance for most of the population necessitates a higher saving rate to prepare for retirement, and health emergency. A large proportion of China’s labor force is now in the phase of the lifecycle to begin saving seriously in anticipation for retirement. The state policy of keeping the size of family small has reduced the number of dependent children, thus enabling the parents to save more. Conclusion The near collapse of the manufacturing sector in the US is partly as a result of the cheap imports of goods from China. This makes the US companies unproductive, and makes the goods produced in the US harder to sell. China and the US also possess a few differences for instance, conduct of business in the United States is more conservative, succinct and polite as compared to that of China which involves a degree of aggression and liberal (Thomas & Susser, 2001). Those China companies that are investing or operating in the US are often small and possess only a handful of employees in addition to having a limited budget. Many blue collar workers have lost their jobs as companies close down. Some cities, such as Detroit in Michigan, that used to be a car manufacturing hub, are now a shadow of their former self partly because goods produced in the US are partly more expensive. To this end therefore, some have advocated protectionism as a means to arrest this trade deficit Protectionism may help US goods face limited competition which in effect brings back jobs to the shores of the United States. 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