Analysis of trade between China and U.S Research Paper
U.S. trade when compared with that of China, otherwise known as the People’s Republic of China (PRC) one would notice a great deal of imbalance. This trade imbalance is in favor of China. It is easy to notice the size of the trade deficit between the United States and China. Apart from the size difference, it is also possible to notice the large imbalance that exist between exports and imports from both U.S. and China. Within the United States, exports in terms of agriculture, services and even manufactured products continue to increase. This is effect will see more of the economy of China grow with an increase in population of those within the middle class. The imbalance in terms of trade relationship between the two countries is that there is more imports within the USA from China than what the latter can export (Carbaugh, 2009).
China alone accounts for nearly 26% of the deficit in trade incurred by United States. This has led to great political debates whereby politicians believe that the US had backstabbed its own industrial base in favor of a country that is communist in terms of it industrialization. The domestic market of China however is on the growth which has become a viable market place for the US for its available goods and services. According to Carbaugh (2009), the geographical differences in time and distance has made it economically viable to make these goods in China as some companies cannot serve customers in China from a US base.
US-China China’s Economic Statistics
|Table 1: China’s Trade with the United States, 2001-11 ($ billion)|
|US exports and imports on customs-value basis.|
|Table 2: Top Ten US Exports to China, 2011 ($ billion)|
|Volume||% Change Over 2010|
|1.||Power generation equipment||10.8||9.70%|
|2.||Oil seeds and oleaginous fruits||10.7||-3.10%|
|3.||Electrical machinery and equipment||7.2||-16.60%|
|4.||Vehicles, excluding rail||6.4||55.60%|
|5.||Aircraft and spacecraft||6.3||10.80%|
|6.||Optics and medical equipment||5.2||8.30%|
|7.||Plastics and articles thereof||5||7.20%|
|8.||Pulp and paperboard||3.8||27.10%|
|9||Copper and articles thereof||3.7||32.70%|
|US Imports from China, 2011 ($ billion)|
|Commodity description||Volume||% change over 2010|
|1.||Electrical machinery and equipment||98.7||8.7|
|2.||Power generation equipment||94.9||14.7|
|3.||Toys, games, and sports equipment||22.6||-9.4|
|5.||Footwear and parts thereof||16.7||5.1|
|6.||Apparel, knitted or crocheted||15.1||7.4|
|7.||Apparel, not knitted or crocheted||15.0||1.8|
|8.||Plastics and articles thereof||10.9||13.0|
|10.||Vehicles, excluding rail||8.1||17.0|
Trading Regulations, Tariffs, and Import Quota
In 1999, USA – China trade signed a deal that gave way for the United States to increase her exports of a wide range of products to China. In this agreement, China eliminated the trade barriers for the United States commodities. Among some of the commitments agreed upon were the significant reductions in tariffs. This commitment was to be fully enforced by January 2004. The agreement also meant that the average for agricultural commodities was going to be seventeen per cent while for US priority commodities; it was going to be fourteen point five percent. A tariff-rate quota (TRQ) also had to be established. This quota system was meant to cater for the importation of bulk goods like rice, barley, cotton, corn, and wheat. A share was also provided for private traders. There was also formulation of specific rules on the way the TRQ had to operate (Drysdale, Zhang & Song, 2000).
The formulated rules were also expected to ensure that there was transparency in the importation process. Also stipulated in the agreement is that for the significant and increasing quota quantities, they had to be subjected to tariffs that were on average one to three per cent. There two nations also granted each other the right for the importation and distribution of commodities without passing them through middleman or state-trading enterprise. China also accepted to eliminate Sanitary and Phytosanitary (SPS) restrictions that have no scientific evidence as their basis. It also agreed to eliminate export subsidies on farm products (Drysdale, Zhang & Song, 2000).
The trade agreement came with a number of effects. First, the commitments made by China ensured that broad systemic barriers that existed for United States exports were eliminated. These barriers eliminated included the limits on who would be responsible for importation and distribution of goods in China, the other barriers like licenses and quotas that barred importation of products from the United States, among others (Breslin, 2009).
As far as tariffs were concerned, China agreed to reduce its tariffs to an average of nine point four percent overall. For the priority products from the United States, china cut the tariffs to seven point one percent. In addition, China was expected to take part in an agreement called Information Technology Agreement. This agreement was meant to remove all tariffs on such products as high technology products, computer equipment, semiconductors, telecommunications equipment and computers. As far as auto sector is concerned, China was expected to reduce tariffs from the then hundred percent or eighty percent level to twenty five per cent by the year 2007(Breslin, 2009).
It therefore, had to have the largest reductions in the first years following accession. There would also be reduction of auto parts tariffs by the year 2007. These tariffs would be reduced to an average of ten percent. Significant reductions were also to be made for the paper and wood sectors. These cuts had to go from the present levels, which were twelve to eighteen percent on wood as well as fifteen to twenty five percent for paper, down to between five and seven point five percent. A great deal of chemical harmonization initiative was also going to be implemented in China. Under the chemical harmonization initiative, tariffs were to be at zero, five point five and six point five per cent for commodities in each category.
The rules from the World Trade Organization restrict quotas as well as other quantitative restrictions. Consequently, china consented to eliminate these barriers with phase-ins, which are limited to 5 years. After accession, China was expected to remove existing quotas for the top United States priorities, for instance optic fiber cable. At the same time, it was expected to eliminate the remaining quotas. This was to be done by the year 2003 and not later than 2006.
In order to make sure a progressive increase in market access was achieved, quotas were expected to grow by an annual rate of fifteen percent. This growth was also projected to reduce the impact of quantitative restrictions. By 2006, auto quotas were expected to be phased out. The quota base level, in the interim basis was expected to be $ 6 billion. This was the level before the auto policy in China’s industrial. This base level was expected to grow by fifteen percent on an annual basis until it was eliminated (Carbaugh, 2009).
Rights to Import/Trade Rights
Trading rights as well as distribution rights constitute the manufacturing sector’s main priority. At the moment there is severe restriction of trading rights by China. These trading rights include right to export and import. Apart from trading rights, distribution rights like transportation, maintenance and repair, retailing as well as wholesaling. China will therefore, under the agreement offer distribution rights and trading rights to the United States firms for the first time. China will phase in trading rights over three years. As far as distribution rights are concerned, the agreement is in such a way that even the distribution sectors that are restricted the most in China like maintenance and repair, transportation and wholesale, will be provided with distribution and trading rights (Mosler & Catley, 1998).
On the other hand, the US-China agreement ensures that as far as trading rights are concerned permission will be granted to both foreign-owned importers found in China and foreign organizations exporting products into china.
Finally, as far as foreign-owned enterprises are concerned, China will, over a 3 year period, phase in trading rights. Minority joint ventures, which are foreign owned will be granted with trading rights. These trading rights will also be granted to wholly foreign-owned ventures as well as majority foreign-invested enterprises (Mosler & Catley, 1998).
Exchange Rate History
The last 15 years has seen a great change in terms of the pattern in trade between the United States and China. Since the beginning of the 1990s, there has been a reduction in the trade barriers between the two countries thus increasing the amount of goods and services traded. Another major factor within the exchange rate history is on the exchange rate movement as China devalued its currency. On the other hand, there was a 25% appreciation for the dollar. China-U.S. trade imbalance is the different economic patterns of both countries. China only has nominal surplus, while the United States enjoys profits. Following China’s accession to the WTO in 2001 and during its subsequent transition period as a new WTO member, the Chinese Government revised its laws and regulations in a consistent with WTO obligations and strengthens its role in the global economy. Nevertheless, U.S companies have certain barriers in china. These include legal regulations on imports and hindrance to access the market. U.S administration have handled these barriers through; bilateral dialogue, export promotion and enforcing trade laws and obligations. There are ways through which the government of the United States seeks to address such barriers which is mainly through continuous bilateral dialogue and engagement, active export promotion, and foreign trade policy (Mosler & Catley, 1998).
The Unbalanced Trade between China and the U.S
Exchange rate of RMB VS USD
U.S. Balance of Trade with China by Sector, 2003-2005
U.S. Balance of Trade with China by Sector
|China’s merchandise and commercial services Deficit (exports less imports)
|Net trade balance in $|
|Machinery and transport equipment||232.24|
|USA’s merchandise and commercial services Deficit (exports less imports)
Agricultural products cotton,food
|Iron and steel
Major sectors of trade between China and the US
The are some sectors of the US whereby there are noticeable and great trade deficits as compared to China. These areas are mainly those are dependent mainly on cheap labor with an abundance in it. Such areas include footwear, apparel, textiles, toys, furniture and even sports equipment.
The foreign investment and growing sophistication in technology within China is a reflection of the deficit sectors which China faces. These mainly include electrical machinery, mechanical appliances as well as machinery. The United States has a deficit of this trade mainly with China on areas concerning books, plastic articles, medical and optical instruments but balances this deficit by trading with other countries. The competitive advantages of the United States are mirrored by the sectors in which this nation runs a trade surplus. Consequently, these sectors include cotton fabrics, agricultural products, and aircraft. The United States has the highest trade surpluses with China as far as steel and iron, iron ores, copper and aircraft are concerned (Thomas, 2004).
China’s comparative advantage today lies largely in labor-intensive manufactured goods. The main disadvantage that it faces is usually in areas of capital intensive industries and those that involve technology as well as the natural resources. There is usually a 12.5% annual increase in terms of the compensation costs towards China. As for the US its main advantage is usually in terms f services such as financial and also in products from agriculture and also in manufacturing high tech items. That advantage may be the result of more production efficiencies. First, it is on the basis of traditional comparative advantage whereby one nation trades those commodities it has in abundance with another nation. The economy of the United States is characterized by extensive farmland having high agricultural yields, high technology, deep capital and expensive labor. Therefore, the United States is expected to be strong in terms of exports of grain, foods, capital incentive products as well as high-technology goods.
The Chinese economy has abundance in terms of technology where there is a mix of high, medium and low technology in areas of agriculture and manufacturing. There is also the availability of cheap and abundant labor with capital intensity. Therefore China has the advantage in terms of exporting toys, shoes, clothes as well as light manufacturers that are not labor intensive. The advantage also extends to the many foreign companies that have invested within the factories in China such as tools, automobile, electronics and household appliances. (Thomas, 2004).
Discussion and Analysis
Only a fair global trade regime becomes an increasingly strong engine that can drive and boost the international economic growth. This is because, if the developing countries, according to the free market advocates, open up their markets to international trade, the poverty reduction can be effectively achieved. However, the current system of the international trade has been designed to be extremely biased and unfair to the low-income nations. Consequently, the fifty least developed countries has a meager share of the international trade which has dropped to zero point six percent equivalent to less than a third of its size forty years ago (Das 96). The root of this unfairness in the global trade regime is in the decision and the move by the economically powerful nations to yield to corporate interests by following a neoliberal agenda. This results in the corporations continuing to increase their profits through private ownership of knowledge, public resources, and services. Consequently, it is ironical since though there are adequate resources to cater for all the basic human needs, still forty percent of the world population live below two dollars a day while fifty thousand people, as a result, die each day. This means it is prudent not to allow trade regime to control essential resources. Among these essential resources are the primary products exported from some countries (Thomas, 2004).
Without the manipulation of these resources by the global trade regime, it’s quite evident that the corporate profit will significantly increase. On the other hand, instead of letting the services, resources and knowledge to be manipulated by the global trade regime, the prudent move will be to allow the same to be cooperatively managed for the common good of everyone. This will ensure that the basic human needs are secured by the availability of these resources. The other problems with the global trade regime in many impoverished nations include the environmental deprivation, increased inequality, poverty, and food insecurity. This is because, at the international level, there is extreme insufficiency of the trade regime, which, at the same time, is environmentally destructive. According to the existing neoliberal model on free trade, the distribution of income resulting from economic growth is skewed, favoring mainly the economically powerful governments alone. The fact that the model makes insignificant contribution to the livelihoods of most of the world’s population implies that the model would, in no way be praised as being predominant for the distribution of global resources (Li, 2009).
For the countries exporting large quantities of primary products, the international trade model subjects them to subsidies and protectionist measures, which bring bias. If the trade were fair, however, these exporting nations would have a chance of enjoying high levels of income from the total volume of trade that they would be entitled to. In this case, there would be significant reduction of the poverty level. Unfortunately, there is considerate disadvantage to the nations exporting primary products since in most cases, these nations do not have the adequate machinery, resources, and knowledge to add value to the primary products and sell them in finished forms. These low-income nations have a small market share in the international trade due to their lack of finance and capacity to produce adequate goods that can meet the demand for an increased market share. Besides, the move by the neoliberal model to liberalize international markets place the agricultural multinationals in a better position where they can overtake the local enterprises in the developing countries by taking control of trade and production. This leads to a significant outflow of resources and capital from the developing countries disadvantaging the development of domestically owned industries (Li, 2009).
The neoliberal model also gives a chance to the corporate interests, high income nations and the global financial institutions to limit the degree of creating fairness in the international trade, paving way for the continual rise of poverty and inequality. At the same time, the model relinquishes the control over the essential services and common resources to corporate interests who, at the expense of the poor exporting nations report unimaginable profits year after year (Das 96). Additionally, the neoliberal model breeds the culture of an economy that is driven by profit and competition among the high-income countries. In this way, in the name of securing self-interests and short-term profits, the rich nations in the international trade will manipulate the resources and exports of high primary products from the poor nations in a way that is biased to the exporting nations. With a fair global trade regime however, most of the countries have seen their economies benefitting significantly.
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