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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


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

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

Lin, J. Y., & Wang, Y. (2015). China’s contribution to development cooperation: ideas, opportunities and finances. Development119.  Retrieved         from

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

        Retrieved from

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



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


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

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


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

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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