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Analysis Of The Us-China Trade

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Analysis of the US-China Trade

The U.S. trade deficit has risen more or less steadily since 1992. In the second quarter of 2004, the trade deficit relative to GDP surpassed the 5 percent mark for the first time. Many economists already considered trade deficits above 4 percent of GDP dangerously high. The fear is that continued growth in this external imbalance of the U.S. economy will ultimately spook overseas investors.

The United States and China share the most imbalanced bilateral trade relationship in the world. The United States imports more goods from China than it exports to a tune of $202 billion dollars each year. All told, China alone accounts for nearly 26% of the United States' $725.8 billion trade deficit. “Increasingly, this imbalance has been the subject of a major political backlash within the U.S. congress, where some have charged that the US is destroying its industrial base to support a communist country's industrialization."

What Causes the Trade Deficit?

The current trade imbalance is caused in large part by intrinsic features of China's labor market and consumer base. The vast majority of China's 1.3 billion people still live in rural areas. China has, by some estimates, a surplus rural labor force of 120 million people, many of whom migrate to industrial centers to look for factory work, and drive down wages. As long as wages are low, the United States will continue to gobble up products made in China, while Chinese consumers will prefer to buy cheaper, homespun alternatives to American products. The rise in trade deficit with China has come at a cost to jobs in the United States, according to a new study just published in Washington. The study found that some 1.5 million US jobs were lost to lower-wage Chinese competition in the 14-year period between 1989 and 2003, when US trade deficits with China rose from US$6.2 billion to US $124 billion. The deficit was expected to increase another 20 per cent in 2004, to US $150 billion.

Furthermore, the nation will go deeper into debt with the rest of the world as Americans continue to rely on the strong flow of foreign money, particularly from central banks in Asia, to finance the trade gap. China, Japan and other foreign governments are some of the biggest holders of government securities, lending money to cover the substantial federal budget deficit and helping to keep interest rates and home mortgage costs here relatively low. As a result, American consumers are able to spend more and save less.

The Effects of the Unbalanced Trade

The vast majority (about three fourths) of our trade deficit in manufactured goods is caused by imbalanced trade flows with Asia, as shown in Figure 2. The deficits with Asia are large and rapidly growing, despite very high rates of growth in the region until 1997. Europe and NAFTA were each responsible for about 13% of the deficit in 1998. The U.S. ran a small surplus with the other countries in the Western Hemisphere, and with the rest of the world, in this period.

Who Wins?

The ravenous demand for cheap Chinese products and investment opportunities by foreign consumers and companies has fueled a rapidly expanding Chinese economy.

For the moment, that means that many parties are fat and happy. Consumers get cheap goods, foreign businesses get cheap labor, and Chinese workers have jobs.

Certain Chinese domestic industries also benefit since they face less competition in markets for more expensive foreign products like computers and washing machines. Since the Yuan buys less abroad, it tends to stay at home.

Indirectly, the poor in the United States and other developed countries also win. Goods such as clothing and cheap electronics which used to be prohibitively expensive (think: the contents of your nearest Kmart) are now sold at very low prices, something that would not be possible without relocating production to developing countries like China. The working poor have been turned into consumers, even as their wages have failed to rise.

And perhaps most importantly, the Chinese government reaps crucial political capital from the economic windfall.

Who Loses?

U.S.-based manufacturers, who have not relocated to China, and their workers, are, of course major losers in this trade deficit. Among the most hard-hit has been the garment industry.

And while many foreign businesses benefit from the cheap labor, which is sustained in part through the currency peg, others lose out. Higher-end products like computers and home appliances are largely priced out of the Chinese market.

Of course, the reality is that everyone will lose in the long run - or at least endure some significant pain - if the current imbalances are not reigned in.

Consequences of U.S.-China Trade Imbalance

The US trade deficit with China ballooned in 2007 to US$295.8 billion. Rising trade imbalance between the US and China in recent years has given rise to intense pressure from the United States on China to revalue the fixed exchange rate of its currency, which had been pegged at 8.28 yuan to a dollar within a narrow band of 0.03% for a decade, from 1995-2007.

Trade in Goods (Imports, Exports and Trade Balance) with China

Trade with China : 2007

NOTE: All figures are in millions of U.S. dollars.

Month Exports Imports Balance

January 2007 4,364.2 25,635.0 -21,270.9

February 2007 4,630.7 23,064.5 -18,433.8

March 2007 5,479.4 22,725.4 -17,246.1

April 2007 4,849.4 24,222.9 -19,373.5

May 2007 5,322.7 25,338.4 -20,015.7

June 2007 5,900.1 27,061.1 -21,161.0

July 2007 4,779.2 28,583.4 -23,804.2

August 2007 5,904.6 28,431.4 -22,526.8

September 2007 5,610.5 29,375.3 -23,764.8




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