Introduction
Objective of the study
The main objectives of the study are to analyze how the trade between China and the US affected the two nations and the extent of effectiveness. Other objectives are to analyze the how the economic reforms can help to improve future economic trade between these two countries. The study also focuses on trade issues between these two countries, projection of China as the most important market for the US, increased purchasing power of the Chinese citizen and the impact of the trade relation between China and US on their trade with other countries.
Statement of problem
According to history, trade between China and US started in February 1784.An US merchant shored at China with his cargo ship consisting of ginseng, animal skins and other goods. He returned to US in 1785 with a cargo of tea, silk, cotton and spices besides a large profit of $30000 that he earned through the trade. This had given an insight to the US traders about the importance of trading with China.
But the first trade between China and US after when China became a communist republic in 1949 happened only in 1972.It was the after effect of the revolutionary visit of US president Nixon and the Shanghai summit.In 1972 Washington-Weyerhaeuser became the first company to receive a Chinese order for an American product i.e. fire boards. In 1973 Boeing received an order for ten 707 aircrafts from China. Later China became a member of WTO.The agreements signed by China with WTO enabled the US to strengthen their investments in China. Statistics shows that China-US trade reached in such a state that China became the third largest trade partner of the US; China became the second largest import trade partner and fourth largest export trade partner. By 2006 China became first among the top export markets of the US.
According to the US statistics 32% of China’s total export was to the US and it account for 14.6% of total import of the US.60% of China’s reserves are in the form of US capital. By 2005 problems aroused in in the trade relations between the two countries. The main issues are the US trade deficit with China, The currency policy of China, issues regarding the US intellectual property rights, China’s industrial policies, issues on the safety Chinese food and other consumer products exported by it. Issues regarding the implementation of agreements made at WTO.Even though there exists these many issues China is considered as the most potential market for the US.
Scope of the study
My research on trade between China and the US is innovative since it can be used in formulation of future trade policies between the two nations. It deals with current issues with US-China trade relations and suggestions for eradicating these issues. The study analyses the issues from both the side. I also believe that this research can be of great importance to a member resident wishing to do trade with either partner country (China or US).The study also deals with the effect of exchange rate in the bilateral trade between US and China and also the one to one increase in China’s trade share.
Literature Review
Current scenario
Exports from China to the United States have steadily increased over the years and the balance of trade situation has bone increasingly in the China’s favour. By 2003 China had become the US’s third largest trading partner and second largest exporter of goods to the US. It has come to such a stage that China has a balance of trade surplus with the economic powerhouses of the world, namely the US, European Union and Japan.
Within the last ten years the pattern of exports by China has undergone a change. Up till the early 1990’s goods exported by China were more labour intensive in nature. But of late, nature of exports from the country has shifted to technology intensive products like electrical and electronic goods and telecommunication and sound equipments. This increase of Chinese exports has eroded the export markets of some Pacific Rim countries and certain newly developed Asian economies. The balance of trade in China’s favour with regard to the US in 2007 stood at USD 262 billions. It is also important to note that overall US trade deficit is growing, but at a slower rate when compared to the trade deficit with China.
US exports to China has also grown steadily, though at a much lower pace. By 2003 China had already replaced Germany and UK as the fourth largest importer of US goods and services and its import figures from the US in 2007 stood at 65 billion. This rise in US exports to China is higher when compared to US exports to other countries.
Increase of US Trade Deficit with China
By the year 1985, the balance of trade began to move in China’s favor. In 2007 US exports to China stood at approximately USD 65 billion and its imports from China stood at approximately USD 320 billion, causing a trade deficit for the US of USD 265 billion.
Exports and imports with China since 1985 from the perspective of the United States. (In millions of US Dollars).
It can be seen that the trade deficit in the year 1985 was only 6 million in China’s favor. By 2007 it had risen to 256 billion USD. By the year 1989, trade deficit of USD 6,234 millions became large enough to overtake the value of total exports (USD 5,755 millions) of the US to China, and has remained that way till date. The magnitude of difference can be understood from the chart below. China’s exports to the US stand at USD 321,507m while US exports to China lags far behind at USD 65,238m.
In this context it would be pertinent to analyse the type of goods that both China and the US export among each other. Given below is a list of ten items that the US exports to China, followed by Chinese export of top etn items to the US. The purpose of such a comparison is to see whether the China’s biggest imports is from the US or from other countries. If the latter is the case, steps can be taken by the US to see that such items can be exported from US for the purpose of increasing exports and thus bring down the trade deficit.
Top ten items US Exports to China by volume.
Compared year 2000 and 2005 figures it can be seen that all itmes of Exports to China by the US has shown a rising trend.
Top ten items Chinese Exports to US by volume.
This data shows that high technology items have replaced labour intensive good for a place in the top three positions. The only item that cannot be classified a high technology item among the top five is apparel and accessories which is holding fourth place.
Causes of Imbalance
Solutions
Causes: The major problem with the US-China trade relation is regarding the increased trade deficit of US with China. Statistics shows nearly 26% of the United State’s trade deficit accounts for China alone. The US exports to China are far less than its imports from China. While analyzing the reasons for trade deficit it observed that intrinsic features of labor market and consumer base of China and the currency peg are the major reasons for trade deficit. Since the majority of Chinese population still live in rural area and China enjoys a surplus of rural labor force that are available for low wages. These factor gives cost advantage to the Chinese product in the US market and thus leads to a higher demand. In case of Chinese consumers, they prefer to buy Chinese products as it is cheaper compared to the imported US alternative.Arguments are there on China’s exchange rate that its artificial overvalue makes the imports to US an inexpensive one. Let us check on to the pros and cons of these two reasons.
Trade deficit aroused in US due to the fact that the import from China to US increased as compared to the export to China. The main reason for the increased import from China is the low price of Chinese products as the labors market in China is cheap. This leads to job losses in the US. “Probably the strongest critics of China are owners and workers at small U.S. manufacturing plants.” (Who Is Angry at China and Why? March 29, 2008, Adam Davidson, NPR).
Exports supported jobs in US at the same time the imports displaced more jobs. The major victims of Chinese competition were the low skilled labours like laid-off textile workers. The intellectual property rights violations of US products by China also make problems for the US industry.
Research methodology
For the research purpose I had collected primary and secondary datas.Primary data are collected through the survey that I had conducted at major shopping malls and manufacturing houses. I had directly contacted the purchasing manager and gathered information from them. I had prepared different questionnaire for shopping malls and manufacturing firms. Some of the questions that I had asked to the manager of shopping malls are;
- Whether Chinese products are available here?
- What is the response of customer towards these products?
- Any particular reason for these kinds of response?
- Whether it creates any change in demand for US made products?
- Benefit that you receive by the selling Chinese products?
I had asked some questions to about 50 customers whom I met at the shopping malls to know their responds Chinese goods. Some of the questions are;
- Would you prefer to buy Chinese goods?
- Which kind of Chinese products you prefer to buy?
- Which attribute of the product made you to buy the product?
- Are you fully satisfied with the product?
In order to know the responds of US manufactures on imports from China I visited some of the manufacturing houses and had a discussion with the purchasing manager on Chinese imports. Some of the questions on which we had the discussions are;
- Are you importing raw materials from China for the production purpose?
- If yes what made you to import raw materials from China?
- If no, whether the Chinese imports effected your business?
- Do you have any plan to import raw materials from China or to implement a plant at China?
- Do you think that trade relations with China will benefits the US economy?
The secondary data for the research are collected mainly from Government and private agencies which include; The US chamber of commerce, Export-import bank of US, Food and agricultural import regulations and standards, United States department of agriculture, The National Customs Brokers & Forwarders Association of America, International monitory fund, and had visited various websites for gathering additional information regarding the topic.
Inferences of primary data analysis
In most of the shopping malls Chinese products are available. Customer’s response towards Chinese products is good even though there exists some doubt regarding the hygiene factor of these products. Customers prefer to buy Chinese products for the reason that these products are cheaper compared to the US made alternative. Thus the demands for US made goods are becoming low, mainly in the case of consumer goods. As per the retailers view the profit margin is low for Chinese product even though the sales volume is high.
Among the US customers, the low income group prefers Chinese goods as it is cheaper and has a good quality. The high income group is not that much favoring Chinese goods. Economic changes in US had provided a good market for Chinese products in US. Some of the customers had expressed their doubt on the hygiene factor and quality of Chinese products as there was previous product recalls. Most of the US customers who are using Chinese products are not fully satisfied with the product.
The purchase manager’s view gives more clear view on the effect of Chinese imports in US based manufacturing houses. Some among the production centers are importing raw materials from China, while some have production houses at China. But those which do not have any import from China are trying hard to face the competition in the market as the cost of production becomes high. Since the Yuan is revalued against dollar and the exchange rate is almost & it supports the US importers to import more from China. It may cause a negative effect for the Chinese exporters as they were getting more dollars previously. Most of them pointed out the fact that extensive imports from China replace jobs in US.
Analysis of issues regarding US-China trade
The main issue regarding US China trade is the US trade deficit with China.The United States imports more goods from China and it is greater than its exports to China. This leads to a degrowth in US manufacturing sector as imported products from China are comparatively cheaper than the domestically made products. It is told that China alone accounts for 26% total trade deficit of the US. This lead to political and economic issues between these countries. The main reason for the development of US trade deficit with China are the currency policy of China, issues regarding the US intellectual property rights, China’s industrial policies, issues on the safety Chinese food and other consumer products exported by it. Issues regarding the implementation of agreements made at WTO.
Issues regarding exchange rate is considered as one of the major issue regarding the trade relation between US and China. The US exporters argue that China devalues its currency against US dollar and gains more US dollar and thus China enjoys more purchasing power in the international commodity markets, China’s currency valuation is not based on the market forces. Thus it makes Chinese imports to US comparatively less expensive.The US argues that it is the major reason for US trade deficit with China, which accounts for 42% of total, non-oil trade deficit of US. If Yuan weakened against dollar it will be too expensive for the Chinese customers to purchase US made goods.
Low valued Yuan helped China to gain trade surplus in the trade between US. Now Yuan revalued at 7 against US dollar. These type of currency peg adversely effected US manufacturing sector so that they have to compete against the low-cost products imported from China. But it had created an even worse situation in US labor market. Massive exports from US had displaced thousands of jobs in US market. Even though the imports from China create job opportunities, it is not sufficicient to substitute the displaced jobs by Chinese imports.
This will also help China to gain massive foreign reserves. If other Asian countries are also devalued their currencies it will be difficult for the US to export goods to Asian countries.
Issues regarding China’s intellectual property right is another issue of US-China trade. Pirated copies of almost all products produced at the United states are available in every nook and corner of China and this creates problem for the US based companies to sell their products in the Chinese market and the Chinese government is not that much concern with this issue. The legal aspects of China regulates foreign investments in China and this prevents US investors from investing in China even though China can be the most potential market for US. China’s industrial policies also creates barrier for exporters in other countries to export to China.
There were agreements with WTO that the state owned enterprises in China operate according to free market principles but it had failed in the implementation of the agreement. Imported products from China are cheaper than the domestic products from the US but the US customers are suspicious about the hygiene factor of these products as there was huge product recalls. Other issues are regarding the agreement made by China with the World Trade Organization. It is said that China fails to follow the agreement. China had implemented tax on certain imported goods and given tax reduction for export of certain goods, this was against WTO agreement.
China put forward high restrictions for foreign companies in entering into service sector in China even though its WTO agreement offers free entry for foreign companies in banking sector and joint ventures in insurance and telecom sector. The US claims that China Had removed the tariff barriers only to implement a new one and also applies VAT on imported semiconductors and offers VAT reduction for domestic products.
But some of the experts argues that China’s currency peg is not the actual reason for US trade deficit. The restriction that the Chinese government implemented on foreign investment makes it difficult for the US investors to invest in Chinese market. The devalued Yuan helps US customers to purchase comparatively low priced Chinese goods as a substitute for the US alternative thus helps the US customers to save more and intern lessen inflation. If the US economy ceases the exports from China then it have to depend on other countries for the import of that goods which they had imported from China previously.
China’s major exports to US are processed products and China depends on other Asian countries for the processing. China’s trade surplus is not accumulated in China alone but it had spread across other East-Asian countries as China depends on these countries. Experts argues that, there are job displacement by Chinese import but it is a minor case while considering the case of skilled labors for the reason that US imports consumer goods which needs less treatment of skilled labors. Still the United states remains as the largest manufacturer in the world and leader in innovations. They are market leader for the production of high precision equipments and aircrafts. So it is said that US labor market won’t be disturbed with Chinese export with the textile industries as an exception.
It is a fact that China is not that much considered about the intellectual property rights. Pirated copies of all products are available in the Chinese market. Chinese government should give more concern to this issue.Issues regarding China’s industrial policy is changed and so many US based firms are operating at China.It was told earlier that these companies are using Chinese subsidiaries as a production centre since they are getting raw materials and for cheaper cost. At last these products are imported to China. But latest reports of these companies shows that they are are operating in Chinese market rather than to cater the US based customers with the product produced in their US subsidiaries.
It also tells that Their Chinese subsidiaries are performing well while comparing to their operation in other countries. Since the Chinese economy is growing and the preferences of Chinese customers are varying so it is a good sign for the foreign based companies. Other thing is the issue regarding the safety aspect of China. There was huge product recalls in the case of Chinese made dolls and some issues regarding the pet- food.There were issues regsrding the use of banned pesticides by the Chinese farmers in their farms.
But Chinese made consumer goods are popular in US market and it can’t be avoided. But China have to be more careful in assuring quality in its exported goods so that a negative impression adversely effect the export market of China. Trade relations with China is not only the reason for US trade deficit but it also is an after effect of economic globalization and the restructured world industries. If the trade relation creats such a situation that both the countries are equally benefited,it will help both the countries in the long run.
But both the country whether it is the United States or the China both got benefited with the trade relations. China got benefited in a way that it got such an export market where its products had good demand. This intern provided more job opportunities for the Chinese labors thus helped to grow the Chinese economy. The significant increase in export helped China to increase its foreign reserves. The US got benefited in a way that the US customers are getting goods for comparatively less price. Thus their expense got reduced and savings increases. The US retailers also get benefited with the availability of cheaper goods. Manufactures got benefited with the availability of raw materials for low cost and this intern reduces the cost of production. The US based companies like Nike has production units at China to utilize the benefit of low production cost.
Companies like General Motors, Intel are importing components from China. So many US based companies are operating with in China to utilize the high potential market of China with its large population. The trade between United States and China are related to trade in four major areas. They are service trade, mutual investment, commodity trade and technology trade. Among the trade in these four areas, the US trade deficit refers to commodity trade. The US enjoys trade advantages in other three areas. The US based companies operating in China are showing high growth rate and it can offset the trade deficit of United states with China. For the growth of Chinese economy it needs US capital and technology in excess and this intern support US economic growth.
The issues that aroused between US-China trade relations are the result of conflicts aroused due to the economic interest among certain industrial sector. It should be settled with negotiations and discussions. The trade co operations should be in such a way that it should give more importance to mutual benefit and disputes should be extinguished before it getting intensified. Since the trade relations are for the benefit of long run the disputes should be settled with the help of friendly negotiations.Trade war also is not a solution for settlement of trade issues as it will adversely effect not only the two economies but also other economies which had trade tie ups with these economies.
Conclusion
The trade between China and the United States has merits and demerits while analyzing the after effects from either side. Some of the merits enjoyed by these countries are mentioned below;
The demand for Chinese products increased as it is cheap, which intern provided investment opportunities by foreign customers and companies and accelerated the economic growth of China. The consumers of US especially the poor ones got benefited by the availability of cheaper-such as cloths and electronic goods, thus more money will be left in the hands of US customers and high profit to the retailers. The US business got cheaper labors by outsourcing their business to China or by directly investing in China and thus they are able to face the growing competition and price war in the domestic market.
Due to the high demand for Chinese products in the foreign market and the investment of foreign companies in China provided much job opportunities for the Chinese workers.
Since China is leading with largest population in the world, it provides a high potential market for the US based companies. The changing taste of Chinese customers also gives hope for imported products from US. The benefits are enjoyed by the entire US population as most of the imports from China are consumer goods for a discounted rate.
Since the Yuan is revalued to seven against 1US$ it will help the US exporters to export more and intern help the US to reduce the external deficit. Since Chinese goods are available at cheaper rate the US consumers will be able to save more money and it is a good sign while considering the economic status of US.
Problems are there on both the sides; imports from China displace more jobs than the job opportunities created by exports to China. The increasing US trade deficit with China for which currency valuation of China is considered as a major reason, deindustrialization in US as major US firms are shifting their operations to China to take the advantage of low production cost. The pirated versions of most of the US made products are available at China.
Since China and the US being the two major economies in the world, the trade issues that prevailing in between them will affect other economies in the world also. So bilateral trade discussion can be a better way to alleviate these issues. The US have to focus on high skill and high value products since it is the leader in innovating high value industry products like precision equipments, medical devices, etc and it is far ahead of China in case of non manufacturing sector also.
China’s supports for US investors to invest in China will help US based companies to easily get established at China and thus to import the products produced in their Chinese factories to the US market. This will help them to sell their own products at a lower cost in the US market or they can sell it at China which is projected as most potential market for US for the coming years. China has to play a fair game in the case of valuation of Yuan as well as in the cases of intellectual property rights and implement hygiene standards in its products for which China being blamed.
US should keep itself strong in trade negotiations with China at in the case of intellectual property rights. If a bilateral discussion leads to a win-win situation it will help both the countries in the long run.If it is possible to combine huge market, low cost labor and resources of China with the capital, management experience and technology of US it will accelerates the economic developments of both the countries.