URC

 The Economic Connections between China and the U.S.:
How to Benefit Both Players through International Trading

Ruby Yanjie Chen
Robert Guang Tian*
Medaille College

Abstract

China and the U.S. are connected economically and help each other with trade, which is a big source of income and a huge benefit for countries with a shortage of certain materials. Nowadays, the U.S. has a very high deficit with China, greater than any other country. It is important to remain on good sides with China, because we can become allies together. Also, China is a very fast growing country. We need to keep up with China with new technology and devices. China is a very important trading partner to the United States.

This paper discusses the international economic theories and their implications in terms of China and U.S. by analyzing the benefits that both sides get from international trading and cooperation. It demonstrates the significance of China to U.S. and the significance of U.S. to China as well as U.S. domestic economies and the economical connections with China, trade history, and so on. It stresses the development of economic relationships between the two countries and analyzes China’s economical situation and the rationales that they keep good economical connections with U.S. in terms of international trading and cooperation. This paper holds that both sides should exert their best efforts to achieve a “win-win" situation economically and discusses the current situation, the problems to be solved, and how to solve the identified problems.

Key Words: Bilateral Relationship, Economic Policy, Economic Strategy, Exchange Rate, International Economy

Introduction

International economics describe and predict production, trade, and investment across countries. We will discuss why it is important for China and the U.S. to keep and improve international trade relations. The benefits we are going to discuss are on a global perspective. Real income is the amount of money that consumers are able to use for consumption of goods or services. When a country increases the quantity of goods or services, real income increases. People are willing to increase spending, given that most other circumstances are stable such as inflation. This applies to every consumer in the world. Real income can also be influenced by the increase in job opportunities. In the international market, many job opportunities become available through the breaking of trade barriers. A barrier in this situation regards obstacles that make a country or region less likely to trade. According to the release from KOF globalization index, economic globalization indexes all surpass 54.42 among the top 100 countries. Singapore ranked number 1 with the economic index of 96.67. United States ranked 26 with the index of 67.56. Meanwhile, China, as a newly fast-growing country, maintained a high globalization index of 60.47 (KOF, 2006).

Globalization means more job opportunities. As more firms expand to the international market, more human capital is needed. Firms that engage in international trade currently employ approximately 57 million American workers. These firms tend to be more productive, have higher employment growth, and pay their workers higher wages than domestically-oriented firms. Production increases can increase revenue and therefore give a company more incentive to expand. Expansion leads to more jobs (Furchtgott-Roth, 2007). As revenue accumulates from expansion, firms can increase wages. Disposable income therefore increases. Disposable income is the amount households have to spend or save after paying taxes. The consumption function shows how disposable income has a direct effect on consumption.

As disposable income increases, consumption increases. Consumption has an impact on GDP, the measure of a national standard of living. Real income and disposable income are increased due to an increase in international relations. Households are able to spend or save more because of an increase in wages. GDP is then increased because of a rise in consumption. China can increase wages due to heightened output. China contends with a huge domestic market. In order to get access for more foreign markets, China requires partners and improvement in employment. "This combination of economies of scale and a growing class of engineers and managers weaned on Western technology, coupled with low-cost labor and government incentives, turns China into a manufacturing juggernaut” (Brown, 2010).

Meanwhile, American manufacturing remains strong in many ways, despite the perception to the contrary. Although employment has fallen sharply in the past decade, output has not fallen. And although the value of manufactured goods has not kept pace with the rest of the economy, this is not necessarily bad news. While overall U.S. prices rose 33 percent between 1995 and 2008, the price of manufactured goods declined 3 percent, according to the U.S. Bureau of Economic Analysis. Surprisingly, people will not ignore that the real wages are up, as inexpensive goods from China hold down inflation and help paychecks go further. According to the latest figures from the Bureau of Labor Statistics, real wages of private-sector workers are up 3.3 percent since 2000. At the high end, real wages rose 5.1 percent for managers and 3.1 percent for professionals despite the recession and pressure from information-technology jobs transferring out of the country. At the less-skilled end, over the past four years there has been a 4.1 percent real wage increase for clerical and administrative support workers, a 3.2 percent gain for less-skilled blue-collar workers, and a 6.7 percent jump for traditionally low-paid health-care workers (Mandel, 2004). These are solid improvements, even compared with the boom years of 1996 to 2000, when private-sector wages showed a 5.4 percent increase.     

The following example illustrates the benefits of outsourcing. "Imagine a computer company started manufacturing computers in the U.S. that were comparatively expensive because of the cost of labor. The company eventually began making them in China, thus bringing down the computers' retail cost so more people could buy them. U.S. laborers lost jobs. But the market expanded. Millions of people now could own a computer, and companies could put a computer on every employee's desk. This required more training for people to use this technology. Companies had to hire teachers. Computers had to be maintained—hence, companies had to hire whole departments to help employees and fix computers." These examples show how opening more doors between China and the U.S. can increase jobs and not decrease them in the long run. Another example is the creation of 15 million jobs in the manufacturing sector from 1996 to 2005 from the loss of 3 million jobs in the U.S. (Yi, 2007, A27).     

Two main theories declaring the importance of international trade is the law of comparative advantage and the Ricardian theses. The law of comparative advantage states that the individual, in this case a country, with the lowest opportunity cost of producing a good or service should specialize in that particular good. Total factory productivity is reduced to labor productivity and, further, to the opportunity cost. The opportunity cost is therefore taken into something oversimplified as mainly determined by the price of labor input: the cheaper the labor, the more competitive the exports. Cheap labor then becomes the foremost comparative advantage for low-income countries. An example of a comparative advantage that China has over the U.S. is the production of led light bulbs. “The economy is growing so fast that in 2009 their manufacturing sector will be larger than the United States manufacturing sector” (Dellenbarger, Lynn, & Zhu, 2009).

China has cheap labor that enables them to produce more at a lower cost. The other significant elements include the importance of rent, technology, and changing demands or perfect competition for price formation and trade patterns. One of the theses of the Ricardian theory of competitive advantage is precisely that labor is not the only primary factor contributing to domestic resource cost. Other considerations include geography, natural environment, technological preparation, currency circulation, exchange rate, transportation, and so on. Only an optimal fit of all these can foster ideal comparative advantages. According to the theory, the U.S. has a comparative advantage in the production of chemicals. If China can make more led light bulbs using 100 million workers than chemicals thus China has a comparative advantage. This means China can export more led light bulbs at a price that is more than the production cost while importing chemicals that are costly to make. Normally, a product may be cheap to produce in one country and the country trades those goods for products that are costly to produce or unavailable. Right now China has a comparative advantage when it comes to savings. The U.S. is suffering from too much consumption without enough real income. The ever-strengthening connection between the U.S. and Chinese economies is a good thing for both countries—as long as trade is not interrupted. The U.S. needs China for loans and China can invest in the U.S. With China producing cheap products, it gives the consumers more money to spend.    

China joined the World Trade Organization (WTO) in 2001 and has since taken major steps to promote trade liberalization. It participates in free trade agreements (FTAs) with ASEAN, New Zealand, and Costa Rica. In addition China is negotiating with Australia for a comprehensive Sino-Australian FTA. However, real free trade has not yet been fully accepted by China or the U.S. This would mean no government interference and open trade between the two countries. Government invention is meant to protect domestic businesses through tariffs and import quotas. One problem China has is a low currency. High tariffs can lead to a lower value currency and therefore less consumption. Both countries have tariffs to protect their nation’s prices. Tariffs allow companies to charge their good at a price higher than the world price. Consumers do not benefit from tariffs because they are being charged a high price. Consumption is a major factor in the measurement of GDP.

Although producers and the government can gain more profit because of a price increase, there is still less consumption. Examples from both countries abound. Recently, the U.S. imposed a higher tariff on China's tires. The U.S. owes billions to China due to China buying debt from the U.S. China rejected a merger by Coco Cola to protect its juice business. The author of an article from Economist states, "The most benign interpretation of the rejection being bandied about by lawyers and bankers is that it reflects a political response to critical comments by America's new administration. The more worrying interpretation is that, even as China publicly urges other countries to commit to opening their markets to Chinese investment and trade, it is imposing yet another barrier to outsiders. Worse still, the barriers are in its domestic consumer sector, one of the few global economic bright spots" (Economist, 2009). Both China and the U.S. are not open to free trade due to the fact each country wants to protect its industries.

China’s protectionist stance can be traced back to various domestic factors. China can claim the oldest civilization in the world, tracing back to more than five thousand years. At the same time, China has been periodically isolationist and less developed than some other countries. Initially it refused international involvement but eventually broke down to allow international trade with a new open policy carried out by Deng Xiaoping. Following this period, China embraced Western ideals largely and reformed its economic system. Despite these changes, the ruling Communist Party of China, having established a Communist government, set in place a Socialist economy that was centrally planned and controlled by the government, while the U. S. espoused a market economy and democratic capitalist framework of governance. The U.S. has long embraced full industrialization and economic involvement characteristic if an internationalized economy. China is still in the process of industrializing; it is demonstrating a large growth spurt to the world.  Take the housing issue as an example. As the housing is the most basic and important situation in every country, next to food provision, the government should pay attention to all the issues that arise out of the marketing operations. How do the two countries deal with their housing issues, and what has been the  result after the adjustment from the “invisible hand” of the two countries?

Currently the housing problem is a great issue in China. Housing prices in China are still on the rise, and owning a home is far from affordable for most Chinese. The Chinese Academy of Social Sciences’ (CASS) “Blue Book,” an annual report of 2010 on social conditions in China, points out that the housing price has increased 15 percent in the year 2010.  “According to the Land Reserve Center’s official announcement, the 2010 land transfer fees in Beijing, as of Dec. 30, 2010, totaled 163.672 billion yuan (approximately US$24.8 billion), an increase of 76.37 percent compared with 2009. Beijing has displaced Shanghai as the city with the highest amount of land income” (Xiong & Li, 2011). The Chinese government continued taking measures to cool the housing price down.

In America, Federal, state, and local governments also introduced measures to control housing prices, through subsidizing household investment in owner-occupied housing. The “invisible hand” makes contributions by adjusting the non-taxation of imputed rents, while at the same time measures such as favorable tax treatment of capital gains, local land-use restrictions, social insurance programs, mortgage insurance, and so on are applied. (Jaffee & Quigley, 2007). All policies are based essentially on the variation of marketing policies. Although housing policies in China introduced measures to cool down prices, including raising rents for public housing, incorporating public housing fees into wages, and pushing out “commodity housing,” the Chinese government tends to focus on favoring the needs of officials and ignoring the value of market adjustment. In other words, corruption is still considered as the root cause of the failure to provide enough affordable, subsidized housing. "A situation has appeared in people’s mind for several years: whatever the new regulations are, they are affiliated with the Communist Party's benefit from favorable policies, while the majority are left out in the cold. Housing welfare for government officers is widespread, and it allows them to distance themselves from the housing market” (Bishop, 2010). The specialized interests have decided the countries’ economic systems and policies. Therefore, no one can arbitrarily simplify the housing issues.

Palley stated that "the distribution of those gains between countries depends on demand and supply conditions that determine the terms of trade (i.e., the relative price of imports and exports), and these conditions can change" (Palley, 2009). For The U.S. or China to be profitable from trading there has to be a substantial amount of demand for a particular product. China has a high demand for U.S. chicken, so the U.S. can gain profit from exporting chicken. Likewise, the U.S. has a high demand for electrical machinery and equipment from China. Thus, the demand and supply from both countries can benefit from each other. When the demand of a product increases the price of the good increases, which make China and the U.S. willing to export more.

Trading helps control prices of products. When there are many companies in the same industry, they tend to keep the price low. If there are a few companies, the prices may rise. Palley discussed the harm of increasing global supply. “Production may be mal-distributed globally, with some countries producing too many types of goods and others producing too few, thereby resulting in inefficient exploitation of economies of scale. First, countries do not benefit from autarky and producing everything, because they lose the benefit of economies of scale” (Palley, 2009). Although the U.S. may want to dominate an industry, it will suffer from diseconomies of scale—meaning the bigger the output grows, the harder it is to monitor. Palley also pointed out the significance of technology and the role it plays in comparative advantage.

Technology helps produce more output and in some cases with less money and time. This can give a country a comparative advantage in producing a particular good. Developed countries such as the U.S. have the newest technology, but it is difficult for new innovations to develop in a short time. China has the opportunity to mimic technology to catch up more quickly. As more jobs are outsourced between China and the U.S., technology is also being spread. This situation benefits China but can harm the U.S. China has an advantage when it comes to education. NSF statistics show that "In the United States, S&E [science and engineering] degrees are about one-third of U.S. bachelor's degrees and have been for a long time. In several countries/economies around the world, the proportion of first university degrees in S&E fields, especially engineering, is higher. “More than half of first university degrees were in S&E fields in Japan (63%), China (53%), and Singapore (51%).”(Science and Engineering Indicators, 2010). The number of natural science and engineering (NS&E) first university degrees in China rose sharply from 2002 to 2006 and more than trebled. Even though the U.S. is experiencing more students from China, China still has more students graduating in the fields needed for research and development (See Table 1).

TABLE 1: S&E FIRST UNIVERSITY DEGREES, BY SELECTED CHINA AND U.S. FIELDS: 2000-2006

Country/economy and field

2000

2001

2002

2003

2004

2005

2006

China

All fields

495,624

567,839

655,763

929,598

1,196,290

1,465,786

1,726,674

S&E fields

359,478

337,352

384,529

533,582

672,463

796,430

911,846

Physical/biological sciences

49,214

63,517

72,526

103,409

134,164

163,076

194,807

Mathematics/computer sciences

NA

NA

NA

NA

NA

NA

NA

United States

All fields

1,254,618

1,260,308

1,308,970

1,365,694

1,417,421

1,456,401

1,502,922

S&E fields

398,602

400,435

415,983

442,755

458,658

470,214

478,858

Physical/biological sciences

83,484

80,124

79,656

81,576

82,872

86,936

93,349

Mathematics/computer sciences

49,233

55,034

61,960

70,789

73,703

69,404

63,310

The Trade between China and United States

Trade relations between China and United States:

China holds the positions of being the second largest U.S. trading partner, third largest export market, and the biggest source of imports. With a large population and a rapidly expanding economy, China is a huge market for U.S. exporters and investors. From the perspective of the United States, imports from China have surged throughout the years, causing worry to some American industries, especially in terms of employment in the manufacturing sector. “Since 2000, the United States has acquired its largest mutual trade deficit with China. The trade in 2010 through August has soared 43 % to $335 billion from the same eight-month period last year” (Lee, 2010).

China maintains a trade surplus with the world’s most well developed economic powers such as the United State, EU, and Japan. The bilateral trade relationship between China and United States is becoming closer and closer and much more complex. The United States is also the largest overseas market of China. The total amount that U.S. exports to China has been surging up dramatically as well, although from a low base.

Even with a global credit crunch, China has remained on top in their economy—only moderately slowing down since 2008. Despite an enormous crash of the Shanghai stock market as well as massive price fluctuations in oil, China has maintained a steady economy, not only for their people but for the rest of the world as well. According to the data from the U.S. and China Business Council (2009), United States is the largest trade partner of China. (See Table 2)

 TABLE 2: CHINA’S TOP TRADE PARTNERS 2009 ($BILLION)

Rank

Country/Region

Volume

% Change

1

United States

298.3

-10.6

2

Japan

268.9

-14.2

3

Hong Kong

174.9

-14.1

4

South Korea

156.2

-16.0

5

Taiwan

106.2

-17.8

Not only is the United States China’s largest overseas market, bit the U.S. exports to China have been growing rapidly as well. In the past decade, the most dramatic increases in U.S. imports from China have not only been in labor-intensive sectors, which include office and data processing machines, telecommunications and sound equipment, electrical machinery, and appliances.

The advantages of trade between China and the United States benefits both sides. Mutual trade utilizes available resources on both sides. Trade with China allows United States companies to take part in an expanding economy. China's foreign trade enhances the country's foreign trade dependency on import-export trading and enhances foreign investment outside China. With foreign trade, China strengthened the relationship with the western world. On the other side, exporting to the United States and accepting outsourcing from the U.S. also bring a great opportunity for China to lower the unemployment rate. China is seizing the chance to maximize its domestic market.

Trade policy developments between the two countries

The United States has taken steps to negotiate trade practices with the Chinese government. In 2006 the United States applied the “military catch all” rule. This rule requires items those are on the commodity control lists to have licenses. Because of their importance to the U.S. economy and many trade partners of the United States, textiles and apparel have been major issues in U.S. trade relations with a number of countries and regions. In 2005, the United States and China reached an agreement on textiles. In attempts to resolve conflicts between the interests of exporters and importers, a number of bilateral agreements have been signed over the years bearing on, and generally restricting, the quantities of textiles and apparel traded. This covers 30 textiles and has quotas that start at very low levels (See Table 3)

TABLE 3: TEXTILE AND APPAREL TRADE WITH CHINA

TEXTILE AND APPAREL TRADE WITH CHINA

2006

2007

2008

2009

Total U.S. Exports (USD, Millions)

450

489

537

431

% Change

23.6

8.8

9.8

-19.7

After China carried out the "open policy," it has undergone a great change during these years. Based on the low-cost competitive advantage, China has acquired a great success in exporting its goods. On the other hand, U.S. domestic firms and workers that compete with low-cost imported Chinese products regard growing economic ties as damaging to U.S. economic interests, largely because of “unfair” Chinese trading practices. Such groups have urged the U.S. government to use a more assertive trade policy to force China to eliminate unfair economic policies in order to help achieve a level trading field for U.S. firms and workers.

In May 2010, the Chinese government decided to buy large holdings of U.S. Treasury Securities, which totaled $868 billion, making it the largest foreign holder of such securities. This outcome is mainly caused by the different concepts in domestic consumption and saving. In China, people tend to focus on saving rather than consuming, while Americans prefer consuming to saving. Until recently China had a very high savings rate, a low rate of consumption, and was heavily dependent on its trade sector for economic growth. Both countries contend that they are now seeking to implement policies to rebalance the sources of their economic growth.

What has been traded?

The United States and China have traded on good terms for over thirty years; these two countries are the glue that holds the economic trading system together. U.S.-China trade rose rapidly after the two nations established diplomatic relations in January of 1979. The countries then both signed a bilateral trade agreement in July 1979 and provided mutual most favored- nation (MFN) treatment beginning in 1980. The trading increased, making U.S.-China trade number one globally (See Table 4).

TABLE 4: TOP U.S. IMPORTS FROM CHINA 2009 ($ BILLION)

HS#

Commodity description

Volume

% change over 2008

85

Electrical machinery and equipment

72.9

-9.2

84

Power generation equipment

62.4

-4.2

61, 62

Apparel

*24.3

*1.5

95

Toys and games

23.2

-14.6

94

Furniture

16.0

-17.4

72, 73

Iron and steel

*8.0

*45.9

64

Footwear and parts thereof

13.3

-7.9

39

Plastics and articles thereof

8.0

-10.1

42

Leather and travel goods

6.0

-18.9

90

Optics and medical equipment

5.6

-9.4

China exports count for US$287.8 billion in zinc, nickel, lumber, oil equipment, and mining. The United States’ trade deficit with China was $232.5 billion in 2006, up 125 percent from 2002. Imports to China include but are not limited to tobacco, corn, & precious metals.  Currently, the United States has a trade deficit with China of about $200 billion, which was about the same as last year. As a clean way of erasing that debt, President Obama put a tariff on imports of Chinese steel and tires. China saw that as a threat and retaliated by putting a tariff on the United States exports. After a long meeting on the situation, President Obama declared  that “free trade” would remain intact between the two countries. China pledged that they would "move toward a more market-oriented exchange rate over time." 

The Importance of Achieving a “Win-Win” Situation

 In order for the nations to be truly stable in the long run and fully integrated in the international community, they must allow for greater transparency, respect for human rights, and movement toward democratic policy. This is the only way to improve the well-being of the regions people, diversify world energy sources, and facilitate the movement of these countries into the world economy (Blank, 2009). For example, the development of Central Asia's economic potential, including its natural resources, requires free market economic reforms and foreign direct investment. In addition, there are many reasons why it’s necessary for the U.S. to keep on good terms in international trading. If the large energy holdings of Central Asian States are restricted to Russia due to lack of oil or gas pipe lines, they cannot be independent. Also, equal energy access for American and other western firms relates significantly to the larger objective of safeguarding the Central Asian States’ independence, sovereignty, and secure development (2009).

Eliminating international trade would eliminate products. For example, if there were not enough oil, there would be a very large crisis. New energy sources would have to be found for transportation. People would be faced with a range of choices: going back to horse and buggy days, buying bio diesels, converting their old diesels, or running their vehicles on used vegetable oil. No more oil would affect the use of rubber tires. Tires would have to be made out of a new material. If the oil reserve were depleted, there would be no more plastics. As a result, how would goods and parts be built? Everything is made of plastic—cell phones, computers, car parts, pens, furniture, appliances, and other household goods. Finally, some people heat with oil. If there was no more oil, people would have to convert their old furnace to burn corn oil, or they would have to buy a new heating source. For example, they would have to purchase a wood stove or a pellet stove or transfer to all electric heat, which would cause the consumers’ energy bills to go up and still more coal to be burned. 

To safeguard energy sources, President Barack Obama and president Hu Jintao agreed that U.S. and Chinese scientists and engineers will work together to speed up the widespread use of electric cars, construct buildings that need less energy, and develop coal-fired power plants that don’t produce gases that cause global warming (Schoof, 2009). Such measures would be excellent because researchers would not have to find a new energy source for cars. Everyone could drive electric cars and eliminate emissions. In addition, the collaboration runs two ways. The U.S. stands to gain not only from an expanded market for exports and more jobs at home but also from demonstration projects in China that serve as large experiments for working out problems in new technology. The work will be anchored through the new U.S.-China Clean Energy Research Center. The $150 million funding over five years will be shared equally between the countries.

The research center and other clean-energy projects could demonstrate to international negotiators working on a global climate protection treaty that the U.S. and China, the world’s two largest sources of greenhouse gases, are serious about reducing emissions. Because both countries put out the most greenhouse gases, if they implement the great idea of switching to electric cars, they could show the world how they both are working together to cut their carbon footprint. Lastly, the mutual collaboration will help scientists work out problems that may emerge. Experience shows that when all these things are strung together there are going to be lessons and surprises to learn (Schoof, 2009).

Most of the world’s major currencies impact one another. Their relative values move up or down depending on market forces. Countries sometimes limit capital outflows when there’s a run on their currency or take steps to discourage money inflows when they fear the speculators love their economies, not wisely but way too well. Despite huge trade surpluses and the desire of many investors to buy into this fast-growing economy, forces that should have strengthened RMB, Chinese authorities have kept it persistently weak. China has done this mainly by trading RMB for dollars, of which they have accumulated vast quantities. In addition, China has carried out devaluation, keeping the yuan-dollar exchange rate fixed even as the dollar has fallen shapely against other major currencies (Krugman, 2009).

This is similar to "shopping sprees" that happen when the U.S. dollar is low and foreign currency is high. The Canadians come to the U.S. because they will get more for their own money. For example, they will go to the Walden Galleria Mall, buy a lot of clothes, and throw the bags and receipts away so they will not have to claim what they bought when they cross the border back into Canada. As undervalued currency demonstrates, China's currency policy is especially problematic in the depressed state of the world economy. Policymakers haven't been able to generate enough spending, public or private, to make progress against mass unemployment. And China's weak-currency policy exacerbates the problem, in effect siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters. Month after month, headlines announce the soaring U.S. trade deficits and Chinese trade surpluses, along with the suffering of unemployed American workers. Instead of China facing up to the need to change their currency policy, they’ve taken to lecturing the United States—telling us to raise interest rates and curb fiscal deficits, making the unemployment problem worse (Krugman, 2009).

Today’s world is undergoing tremendous development and change; how China and the United States define their relations means much, not only to each other but it means a lot to the rest of the world. U.S. Secretary of State Hillary Clinton said U.S. and China relations would decide whether the 21st century international relationship is hostile or peaceful. U.S. President Barack Obama has also stated that China relations would shape the 21st century. This means that however China and the U.S. get along with each other is how the 21st century will run (BBC News, 2010).

“Bilateral communication has been expanded geographically against globalization, and the contacts involving China and the United States occur every day at almost every corner of the world, not just between the two countries. The major challenges of the 21st century, from climate change to nuclear proliferation to economic recovery, are challenges that touch both our nations and challenges that neither of our nations can solve by acting alone. Both Obama and Clinton pointed [this] out . . . . , under the circumstances of the international situation undergoing intense and complex changes” (Xinhua News, 2009). The United States and China now have to look each other straight in the eyes, recognizing that the core of their relationship rests on the strategic foundation of stabilization—stabilization of the global economy, global ecosystem, and global security. They need to face challenges together, not just having their own problems. China and the U.S., as the world’s largest developing and developed country respectively, are taking the leading role in international business and the trends of global dynamics.

The World Trade Organization confirmed China's top position in the global markets. China is going to continue playing an important role on the world stage. In the rapidly changing world, the bilateral relationship between China and United States has a far-reaching impact on the Future. The presidents from both countries have already paid attention to the issue that the world needs to have all countries connect as a whole, which will not only benefit the people but also make contribution to the world financial system and global trade (Lampton, 2009). Such positive strategic connections, as established by heads of state, and enriched relations and cooperation would build towards a cooperative and comprehensive relationship as the 21st century continues.

How to Benefit Both Players through International Trading

The United States and China are big investors in one another. The United States is interested in many aspects of China’s new technology. They trade everything from new data processing and sound equipment to toys, tires, shoes and apparel.  Still, numerous problems while trading with China have been faced in the past few years. People are calling the relationship a trade war between the two countries. The United States keeps placing tariffs and high taxes on imported goods. In some ways, this helps Americans. More of them can keep their jobs in factories and other work places. However, such moves are also driving up the price of goods. The high price level hurts an already poor economy. Another problem that the U.S. might have is that China might want to curtail trade with the U.S. because they don’t want to deal with high taxes. If this happens then the U.S. will lose a good trading partner and have to find another party for import and export of goods. This will again add another huge problem to the U.S.’s already full plate. The next problem is the currency issues between United States and China. China wants to maintain control over their currency, the Yuan, but the problem does not all depend on China. The United States needs to deal with a very high deficit rate. It so happens that the U.S.’s highest deficit rate lies with China.

First, there is a need to talk about the trade deficit of the United States and the deficit with China. A trade deficit concerns the balance of trade, the relationship between exports and imports. A trade deficit happens when a country imports more than it exports. This is not a good thing as countries aim for a trade surplus, with more exports than imports. Because China is growing so rapidly and producing so many more products at a cheaper price, they are exporting goods all over the world. The United States has fallen victim to this phenomenon. Americans have been importing goods from China to a far greater degree than they have been exporting. In 2008 the trade deficit with China was $266 billion (See Table 5)

Table 5: U.S. MERCHANDISE TRADE WITH CHINA: 1990-2010 ($BILLION)

Year

U.S. Exports

U.S. Imports

U.S. Trade Balance

1990

4.8

15.2

-10.4

1995

11.7

45.6

-33.8

2000

16.3

 100.1

-83.8

2005

41.8

243.5

-201.6

2006

55.2

287.8

-232.5

2007

65.2

321.5

-256.3

2008

71.5

337.8

-266.3

2009

69.6

296.4

-226.8

2010

93.3

365.8

-272.5

This was the largest trade deficit America has had with any other country or other trading groups. It beat out other groups like OPEC and the European Union (USITC Data Web). The U.S. should look at these statistics and think about what is needed to lower this number. China is growing, and its economy is getting bigger and stronger. Soon they will be dominating the whole trade market.

The largest exports to China by the U.S. are semiconductors, electrical components, waste and scrap products, oilseeds and grains, and aerospace products. Because China is growing so rapidly, the United States should take advantage of this and export as much as it can to China. As previously stated, China is growing so rapidly, China has a large population that grows significantly every year. If the U.S. started to export more, especially to China, it can start to reduce its trade deficit. China’s biggest markets in cellular use, Internet use, and commercial air travel (Morrison, 2010). Because of such high population, China is the second largest market for new cars. These are things that Americans should be looking at and thinking about to increase trade with China. Companies like General Motors should be thinking about deals they can make with China.

China’s largest exports to the United States are computer equipment, communications equipment, apparel, and audio and video equipment. Other miscellaneous products include toys and games. As previously noted, China has become the number one importing country to the U.S. Why does the U.S. import so heavily from China? Because most of the things made over in China, like toys, games, and apparel, are manufactured at low cost. Employees work at a lower wage, so the companies sell them at lower levels than other countries are charging and still make a profit. The United States buys these products because they are the cheapest ones on the market. Due to its importing practices, the U.S. is creating problems for itself. One, the United States is creating a progressively larger gap in trade deficits. Second, to some extent, because the U.S. imports lots of stuff and establishes plants in China, the U.S. is putting Americans out of jobs. Average unemployment during 1998-2006 was actually lower than the average level between 1980 and 1988. For instance, some Americans lost jobs in factories because it is less expensive to import materials such as clothes, shoes, and toys form China than it is to make them in America. However, the problem of dramatically increasing imports from China lies not only with the United States. Many of the foreign companies that traded with the United States were bought or moved to China. This factor also contributes to the trade deficit.

The next problem that arises with trading between the two countries is the quality of the imported product. Over the past few years there have been many recalls on imports from China, including toys containing lead-based paint or harmful parts. Toys have been recalled because of loose magnets that could choke children. Aqua Dots was a toy recalled because it was toxic to kids if ingested. Toy ovens to bake cakes or cookies were harmful because they were not made with enough precautions to reduce harm. Because China is the main exporter of toys to the United States, recalls like this hurt demand for toys. It also harms trade relations with China. America also had a problem with tires imported from China. The National Highway and Traffic Safety Administration recalled over 250,000 tires, due to a missing lining in the tires (Gibb, 2007).

China’s currency policy is one of the growing problems the U.S. is having with China. At the present time, the dollar-yuan exchange rate is 6.67 yuan per dollar. It appreciated 0.2 percent compared to the beginning of 2009, and the America government believes China continues to undervalue its currency. The reason there is such a big concern over the appreciation of the yuan is because this makes Chinese exports to the United States cheaper and the United States exports to China more expensive, thus making it very unfair to trade with China. The outcome is the high trade deficit. It can also be said that this currency policy has hurt American factories and suppliers to China. They cannot compete with the low rate and price level that China offers the United States. The Chinese government has been trying to tell people that they are using currency policy to maintain economic stability. Because China employs capital controls, the exchange rate that provides external equilibrium will be different from the equilibrium rate under the free flow of capital. A faster rate of RMB appreciation is needed, but it is not the sharp appreciation that would create overshooting that might reduce economic growth. If they were to change their policy now, it would severely hurt the Chinese economy and put many people out of jobs. It would also inhibit export industries from helping to spur economic reform.

There are many issues that the U.S. needs to clear up in time to save the economy in the end. It is essential to examine U.S. trading behaviors and to  see what can be done to lower trade deficits not only with China but also with all our other traders as well. China should curtail investment and rely on consumption-led growth through increasing the interest rate and required reserve ratio. Both China and the United States must collaborate to push the Doha round of the World Trade Organization to a successful conclusion. Both countries should provide leadership to prevent the unraveling of multilateral free trade. The U.S. needs to start exporting more than it imports. The U.S. needs to examine other countries to see what various national and regional markets include and what it can do to facilitate export to them, to start making more money for the United States. The U.S. especially needs to recognize how fast China is growing. The U.S. relationship with China can be improved even further through mutual research by both countries in respect to exports. People from different countries might have different perceptions about the meaning of international trade, let alone people from the same countries with different backgrounds and occupations. They are disproportionately affected by benefits and losses from globalization. Therefore, it is difficult to ascertain degrees of aversion to international trade between different countries.

New business start-ups in America would benefit both the U.S. and China. More jobs mean less unemployment and production at high output rate. It would be helpful to institute more fine-tuned regulations and rules on what the U.S. imports from China, especially toys and tires. The current situation does nothing but put Americans in danger by letting China produce products that are defective. If China wants to export to the U.S., then they both parties need to come to an agreement on what types of regulations should be put in place. Last, the nations need to get together and talk about their exchange rates. An expenditure-switching effect might help improve the U.S. current account deficit with China, as well as other Asian nations. Nevertheless, the income-reducing effect of currency appreciation is more powerful than expenditure switching. If the Asian economies slow down, improvement in the overall U.S. current account deficit would not be considerable. Furthermore, there would always be a delayed adjustment due to the currency pass-through effect of currency realignment. By lowering the appreciation of the yuan, products from China could become cheaper and easier for countries to buy. It is not fair to the United State or other countries that are trying to produce the same exact product but have no way of competing with China because of extremely low prices. If we can fix these problems, then together successful economy can emerge (Forbes, 2010).

Conclusion

 Trade between the United States and China can increase the standard of living in both countries. Moreover, as two of the world’s strongest economic powers, the win-win strategy can promote the overall growth in the global economy. Because both countries have a comparative advantage over certain products, exports can increase. When exports increase, then the respective GDPs will increase accordingly. This will eventually boost consumers’ real income, which, in turn, can strengthen their ability to improve goods, services, and purchasing power. Consumers will benefit from China's cheap labor and relatively low-priced goods, because they will have more money to spare from buying cheap products. China needs the U.S. in terms of investments and services. As jobs are being outsourced, there is a short-term negative effect of people losing jobs. Nevertheless, in the end, there will be many more jobs created. In the modern world, technology plays a great role in countries' development. Outsourcing also offers an opportunity for countries to learn new technology. Technology is one leading factor for countries to gain a comparative advantage. Firms that engage in international trade pay their employees more and have high production rates.

The U.S. and China need to come to terms with the imbalance of trade. The United States and China also need to come up with different regulations in order to break the trade barrier between the two countries. In order to improve life for the people in both countries, attention must be paid to innovation and technology, thus coming out with advanced goods and services to satisfy the needs of people in both countries. Both sides should strengthen the regulations on the quality of goods produced. Many recalls have been harmful to living standards and trade relations in the past couple of years. Both countries need to meet to develop rules and regulations that must be met before selling goods. Last of all, the United States is faced with the enormous challenge of figuring out how to get itself out of such a big deficit, both for its own sake and to maintain a good relationship with China.

President Barack Obama and President Hu Jintao agreed that U.S. and Chinese scientists and engineers would work together to speed the widespread use of electric cars. This will greatly reduce carbon emissions. In addition, the world’s currencies all impact one another. China has kept its currency relatively weak by trading RMB for U.S. dollars. Lastly, China and the United States have common responsibilities related to regional and global security issues. The relationship between China and the U.S., as the world’s largest developing and developed countries respectively, reflects a new character of changing world structure in this new century. China and the United State have to enhance their relationship and enlarge mutual interests in order to make further achievement and greater contributions to the entire world, not only limited its economy but also in terms of world peace and civilization. China is willing to work with the U.S. Meanwhile,  the U. S. is seeking corporate opportunities with China. This can have far-reaching consequences, not only to the two countries themselves but also to the larger scene of a world watching how the relationship between the two countries plays out on the world stage.

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