Writing Assignment #2 - Essay Example

Econs 102 Writing Assignment #2 Trade Imbalances The term trade imbalance refers to the U.S. trade deficit and the large trade surpluses in China and other countries from whom it imports from. According to the U.S census bureau, the U.s trade deficit increased from $500 billion in 2010 to $558 billion in 2011. Two-third of the growth of the trade deficit was as a result of increased importation of crude oil and refined petroleum products. U.S trade deficit with China in 2010 was $273.1 billion.

The Business and Industry Council’s interest in discouraging imports is for the best interest of American citizens. This is because; absorption of U.s domestic demand for goods by exporters in China and Oil exporting countries has widely suppressed domestic job creation in the U.S. In 2011 and 2010, the increasing trade deficit with China led to 2.8 million jobs displacement in the U.S (Bordon 2011). Other factors that have led to the shrinking of the manufacturing sector include rising technological changes, which have increased labor productivity, forcing firms to hire few workers.

It is incorrect for the Business and Industry Council to blame imports alone for the international imbalance that have led to manufacturing crisis. Manufacturing crisis refers to the long-run trend of failing employment in the manufacturing sector in the United States. The macroeconomic policies that China has adopted of currency devaluation, increasing U.S dollar holding and, subsidies advancement to a range of industries are some of the major causes of the high trade deficit. By 2011, China had accumulated $3.

26 trillion in foreign reserves in U.S treasuries. In Chinese auto-parts industry, both domestic and foreign owned plants have received $27.5 billion in government subsidies. In 2006, 58.2 per cent of China’s exports were from foreign firms operating in China. These firms are taking advantage of the subsidy policy and availability of cheap labor in China. China and other low wage rate countries enjoy availability of cheap labor, relative to their counterparts in the U.S and other developed countries.

This is the area where they have a comparative advantage in manufacturing.Global economists have argued that the main cause of the U.S. trade deficit is saving-investment disproportion as opposed to the common idea of Chinese Yuan devaluation (Hall and Lieberman 913). The economists propose that the country’s policy makers need to focus more on how to solve saving-investment imbalance. The main cause of the U.S. deficit is basically excess consumption and low saving rate among the U.S. population.

It is also attributed to big deficit by the nation’s government. There is higher demand for U.S. assets than the U.S demands foreign assets. This trade is used to finance consumption, which in turn fuels the country’s trade deficit (Hall and Lieberman 913). In absence of strong U.S. demand for investment, the U.S interest rates are pushed down consequently leading to large current account deficit. The U.S saving are insufficient to finance investment.There have been claims by many people that undervaluing of the Chinese currency, Yuan, has increased the U.

S trade deficit hurting the U.s manufacturing and depressing the U.S employment. According to the Congress Research Service report (2008), China’s foreign exchange rates reserves increased from $403 billion to 1.5 trillion between 2003 and 2007. In 2010, the reserves were 3.2 trillion. However, according to Huang (Para 6), China’s surpluses do not fuel America’s deficits. According to him, the U.S. trade slit started growing around 1998 and peaked in 2005. On the other hand, China’s trade surpluses began to rise in 2005 peaking in 2008.

Form this trend; it is clear that the Chinese trade surplus and the U.S deficit have no direct connection and points out that U.S trade deficit originates from country- specific circumstances.Lutes (1959) argued that, lax U.S financial regulations that have fueled over borrowing and overconsumption of Chinese products are the major policies encouraging the increasing trade deficit. Not all high wage countries that trade with China have a trade deficit. Netherlands and Germany are among the high wage nations that trade with China and yet they are enjoying trade surplus.

The Business and Industry Council should not be perceived as an unbiased source of information because it is an association of business owners and executives that looks mainly at the plight of producers rather than consumers.In conclusion, Business and Industry Council allegation that the international imbalances are caused by excessive imports, which, in turn, are fueled by low wages in other countries, is not in itself entirely true. As explained above, there are many factors that cause international trade imbalances.

For example, saving-investment imbalance within the country has been pointed out by economists as the main cause of the U.S. trade deficit. More of U.S. investment assets are demanded by foreign countries than the U.s demands foreign investment assets. The U.S. exhibits an economy with low saving (high consumption), which cannot adequately fund investment demand.Works CitedBordo, Mecher. Exchange Rate Regimes and Globalization. Chicago: University of Chicago, 2003. Print.Hall, Robert Ernest and Marc Lieberman.

Economics: principles & applications, 6th Ed. Mason, OH: South-Western Cengage Learning, 2013.Print.Huang, Yukon. Don’t Blame China’s Currency for U.S. Trade Deficit, April 19, 2012. Accessed on March 22, 2013 from Lutes, John. Balance of payment and economic growth. New York: Herper and Brothers, 1959. Print.