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The Law of Comparative Advantage Implications for the Us – China Trade Relationship

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The law of comparative advantage: Implications for the US – China trade relationship

Bellevue University

Objectives/problem definition

  • To explain the law of comparative advantage

  • Define the US – Chinese trade relationship from a historic context

  • Identify how US and China have benefitted from trade as well as those who have been affected adversely

  • Explore current US and Chinese domestic and trade policy

  • Provide strategic recommendations for managers and policy makers moving forward

Law of comparative advantage

  • Law of Comparative Advantages was first formulated by David Ricardo

  • If each country would focus on the products in which they were most efficient in producing and trading for the products they were least efficient

  • Then both countries would maximize their production and improve the welfare of their people

  • While trade will produce a net benefit to each country,  there are those who are adversely affected.

  • According to the Stolper-Samuelson Theorem, trade will make low-wage unskilled workers worse off (Deardorf1997)

  • Free trade has contributed to rising inequality among American workers

  • However,  social policies can be devised to assure the benefits of free trade are enjoyed by all (Deardorf 1997)

US-China trade HISTORY

Relationship prior to China entering World Trade Organization

  • Off and on trade relationship since Trade Agreement of 1844

  • US began offers aid to China during World War II

  • US held distinct advantage in trade over China

  • Nixon Administration

  • Clinton sign’s U.S.-China Relations Act of 2000

US-China trade HISTORY

Relationship after China entered the World Trade Organization

  • China joins World Trade Organization in 2001

  • China’s rise in trade with the United States

  • Comparative advantage turns in China’s favor

US-China trade deficit

  • $83 Billion in 2001 to $310 Billion in 2012

  • US has been running trade deficits with the rest of the world for more than 30 years

  • Unique advantage = US Dollar

  • If not the exchange rate – then what?

US-China Trade  - why china?

Several determinates have been identified:

  • Relocation of exports to China from elsewhere in Asia

  • Measurement differences

  • Overcounting Chinese exports to the U.S.

  • Undercounting U.S. exports to China

  • Americans consuming but not saving

  • U.S. restrictions on high-tech exports to China

U.S. –China Trade deficit

Will the U.S. Trade Deficit ever go away?

US Economic state and structure 1

Market oriented

  • “Free enterprise”

  • Flexibility

  • Government protection

2014 “strongest year for labor market recovery…”

US Economic state and structure 2 (Policy)

Economic Policy

  • Monetary

  • Federal Reserve System

  • High = Stimulate Borrowing
  • Low = Slow Borrowing

        

  • Fiscal

  • Raising Money

  • Spending Money

China Economic state and structure 1

The ‘World’s Factory’

  • Capitalist Market Principles

  • State-Owned Enterprises

“One Road, One Belt”

  • Strong Networking Force

  • Efficiency

  • Catching up

China Economic state and structure 2 (Policy)

The “New Normal”

  • Economic Reform

  • “Going Global”

Strategic recommendations for managers

  • Increase exports in general

  • Renewed focus on innovation

  • Reward innovation

  • Hire for talent

  • Continue to develop your human capital

  • You must create new competitive advantages

Strategic recommendations for policy makers

  • Implement policy for displaced workers, provide for reeducation and training

  • Renewed investment and focus on quality, affordability, and availability of education

  • Promote/encourage international trade for SMEs

  • Assure financing is available

  • Provide corporate education on domestic and foreign policies

  • Assist with marketing of US products to international markets

  • Additional pressure for China to reduce protectionist policies

References

Deardorff, Alan V.  (1997) Benefits and costs of following comparative advantage. Retrieved from    

         http://fordschool.umich.edu/rsie/workingpapers/Papers401-425/r423.PDF

EW World Economy Team. 2 Jun 2013. Economy Watch. US Economic Structure. Retrieved from

         http://www.economywatch.com/world_economy/usa/structure-of-economy.html

Lin, J. Y., & Wang, Y. (2015). China’s contribution to development cooperation: ideas, opportunities and finances. Development119.  Retrieved         from http://www.ferdi.fr/sites/www.ferdi.fr/files/publication/fichiers/wp119_lin-wang_paper_for_ferdi_web_2.pdf

Schell, O., & Chovanek, P. (2013). U.S.-China economic relations what will the next decade bring? Asia Society. 

        Retrieved from http://www.chinafile.com/conversation/us-china-economic-relations-what-will-next-decade-bring

Tang, Y., Zhang, Y., & Findlay, C. (2013). What explains china's rising trade in services? Chinese Economy, 46(6), 7-31.         doi:10.2753/CES1097-        1475460601 Retrieved from http://ezproxy.bellevue.edu:80/login?url=http://search.ebscohost.com

        /login.aspx?direct=true&db=bth&AN=95012384&site=ehost-live

References

The Daily Star. 09 Nov 2014. China Presses on With New Silk Road Plan.

        http://www.thedailystar.net/china-presses-on-with-new-silk-road-plan-49386

 

The Diplomat. China Power. China Sets Economic Reform Targets for 2015. 12 Dec 2014.

        http://thediplomat.com/2014/12/china-sets-economic-reform-targets-for-2015/

US Department of Commerce: Bureau of Economic Analysis. 30 Jan 2015.

       http://www.bea.gov/newsreleases/national/gdp/gdp_glance.htm

 

US History.org. 2015. American Government. Policy Making: Political Interactions.

        http://www.ushistory.org/gov/11c.asp

Yue, K., & Zhang, K. H. (2013). How Much Does China's Exchange Rate Affect the U.S. Trade Deficit?. Chinese         Economy46(6), 80-93. doi:10.2753/CES1097-1475460605

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