Trade Between the Eagle and the Dragon:

A Comprehensive Analysis of U.S. and Chinese Trade Relations

Matthew T. Laidlaw

Professor Ahmad

Political Economies

02 December 2010

Laidlaw

Matthew T. Laidlaw

Professor Ahmad

Political Economies

02 December 2010

Trade between the Eagle and the Dragon

The U.S. and Chinese government have experienced a mixed trade relationship.

On one hand the U.S. consumer has enjoyed cheap manufactured goods that

competitively rival the more expensive goods of the U.S. manufacturers. Yet the U.S. has

also experienced the negatives associations of higher unemployment brought about

through decreased manufacturing opportunities within the U.S. Along with these two

distinctions, the Chinese and the U.S. have both been strained by the tensions brought

about during the Cold War as well as the tensions brought about through China’s

adoption of Communism during the Post-WWII era. Despite these historical conflicts,

U.S. and Chinese trade has expanded rapidly.

In fact the two nations have become so interconnected, that either would

inevitable suffer as the other does. The U.S. has so greatly expanded its role of

globalization that its economic security is greatly dependent on nations such as China.

U.S. economic security has become so dependent on exports to less developed nations

that in 1978 less developed countries accounted for 29% of all manufactured exports. By

1990 this number had risen to 36.4%. Of this percentage of manufacturing exports, nine

nations (China, Hong Kong, Korea, Malaysia, Singapore, Thailand, Mexico, Brazil, and

Taiwan), accounted for 79% of this growth (Sachs, Shatz, Deardorff, Hall p 1).

The Chinese have even greater vested interest in the economic abilities of the

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U.S.. A large portion of the Chinese economy rests entirely upon the U.S. consumer. If

the American consumer suffers as a result of economic events, the Chinese then suffer.

If U.S. consumers suffer economically, they in turn purchase less Chinese products.

The Chinese have attempted for many years, to create demand within their own nation

but have struggled. As such the U.S. consumer base has appeared as a far more attractive

market.

Growth Since the Cold War Era and China’s Emergence into the WTO

In July of 1979, the U.S. and Chinese re-established trade relations by signing a

bilateral trade agreement. Since the signatures of both nations, the two have seen

widespread trade growth. In 1980 the U.S. signed to give the Chinese Most Favored

Nation status. As a result the Chinese began to export massive amounts of manufactured

goods (Morrison pg 2-6).

Since 1979, the Chinese have begun to implement many national reforms

including trade liberalization and many changes in in order to be recognized by the World

Trade Organization. During these changes to become a member of the WTO, China

lowered its tariff rates to 8.9% for industrial goods and 15% for agricultural goods

(Morrison 16-18).

China also limited agricultural subsidies as well and completely eliminated

subsidies for exported agricultural products. It granted trade rights to foreign enterprises.

It also vowed to treat WTO member nation’s investments with non-discriminatory

treatment. These firms would be treated the same way as a Chinese firm would be. It also

agreed to the WTO’s intellectual property rights agreements (Morrison 17-18).

Predictions of Future Trade Growth

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The Chinese economy has seen massive growth rates over the past decades. In

1978 total trade in manufacturing goods were roughly $0.5 Billion. By 1990 this number

rose to $17.5 Billion (Sachs, Shatz, Deardorff, Hall p 52-53). And in all trade sectors the

numbers have risen from $5 Billion in 1980 to $409 Billion in 2008 (Morrison p 1). It is

predicted that if current trends continue, U.S. and Chinese trade will grow by 16.1 % a

year (Sachs, Shatz, Deardorff, Hall p 55)

Despite this growth, the Chinese economy rests upon the basis of its low wage

manufacturing sector. As a result internal demand remains relatively low and will

continue to do so without a more direct wage increase. Without wage increases, trade

with the U.S. should continue to rapidly grow.

If however the Chinese beings to increase wages to its manufacturing sector, one

would expect to see lower growth rates of trade with the U.S. As wages increase, the

price of manufactured goods also increase. As these prices increase, demand from the

U.S. decreases. This possibility of wage increase would however tend to improve internal

demand. As workers make more, they tend to spend more. This model of demand works

well when comparing most Western nations.

Despite this example of the West, the Chinese economy does not respond in the

same way. The Chinese economy is built upon low wages as well as high private savings.

As workers in China make more money, they tend to save more money. If this money is

saved, little demand is created and unemployment rises. It is because of this cultural

distinction between the U.S. and China; that the two economies have become so closely

intertwined together. The Chinese must look to the U.S. for sales and the U.S. must look

to the Chinese for their cheap products.

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Despite this dependency the U.S. has attempted to return once again to a more

independent approach towards Chinese products. Currently the possible adoption of a

lower currency rate by the U.S., appears to be the largest possible factor leading to

slowed trade growth between the U.S. and China. The Chinese have been able to

maintain relatively strong employment rates as well as produce cheap products, partially

as a result of their artificially low currency rate. It is because of these two emphasizes

that China and the U.S. have so successfully traded and grown more intertwined.

Despite this trade growth many politicians are emphasizing reform when dealing

with the Chinese currency rates. As of 2008 the Chinese had a $250 Billion trade surplus

with the U.S. As such many in D.C. are clamoring for economic reform. Many politicians

fell that by either lowering the value of the dollar when compared to the Yuan or

economically forcing the Chinese to raise the value of their own currency; Chinese

exports to the U.S. will decrease. As such demand for U.S. exports will increase as well

as internal demand for U.S. products (Hale, Hale p. 57).

This however would create great economic strain on the Chinese and therefore

incur damage to the U.S.. Much of the U.S.’s imports rely upon the Chinese. If the value

of the Yuan increases, Chinese products become more expensive. Many businesses and

factories would suffer if the Chinese products they rely upon increase in price. Many of

the U.S.’s factories would see increased production and business, but the time it would

take to produce the infrastructure needed to remodel our economic system would take

time, time that many businesses do not have.

Furthermore the Chinese economy would greatly suffer. Many Chinese companies

rely upon our current economic model of exchange. As such many of these firms would

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close. Without these firms many U.S. firms would also lose business as their Chinese

consumers lose money.

As the value of the Yuan increases to the dollar, U.S. foreign investment in China

would also decrease. American investment into China would cost more, as such

expansion of factories into China would decrease. As a result many U.S. firms would

have to decrease expansion projects already established in China as well as lay off

workers. As workers lose their jobs, internal and external demand decreases. Decreased

demand leads to decreased sales, which leads to decreased manufacturing; which again

leads to decreased employment. Both economies are so reliant upon one another that

destabilization of currency or trade relations, causes severe economic distortion.

The Global Financial Crisis

The financial crisis of the 2000’s created trade distributions between the U.S. and

China. The financial crisis trimmed the trade deficit of the U.S., yet it has also

encouraged more intervention from Congress to reform economic policies.

As a result of the struggled economy, the U.S. Congress has scrambled to “fix”

the problem, as such many senators and representatives have emphasized our dependency

on China as the core of the problem. These congressmen argue that our dependency on

China has created massive outflows of wealth from the U.S. to China, and that this

dependency is the cause of unprecedented Chinese growth rates.

This protectionist sentiment has escalated with “Buy America” legislation in the

recent stimulus package. This legislation gives biased aid to American companies that

purchase American made goods; such as tax breaks, subsidies, etc. This legislation has

also created tense trade relations with the Chinese, who have crafted their own “Buy

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China” legislation in their own stimulus bill. This in turn has hurt many American

companies in the same way “Buy American” legislation hurt the Chinese.

The argument made by “Buy American” legislatures, seems to be that we have

grown to dependent on the Chinese. As such many believe the current crisis could have

been avoided, had the U.S. not been so dependent on the Chinese. Many believe that the

Chinese have made massive profits and therefore been able to create massive growth on

the grounds of economic struggles of the U.S. (Prasad 2009).

The problem with this argument is however; the fact that China has also struggled

greatly due to the current financial crisis. The Chinese economy relies upon its exports.

Without expanded exports, China will be unable to maintain its growth. When its trade

partners struggle, just as the U.S. and most of the world has; China’s exports decrease,

because foreign costumers cannot afford them.

China has so much vested foreign investment in the states, that any economic

failings in the U.S., also harms the Chinese; and vice versa for U.S. foreign investments

in China. The current protectionist sentiments growing as a result of the financial crisis

only act as counter-productive, as business stability between the nations becomes

interrupted. Companies throughout both nations cannot grow if they doubt their abilities

to expand in a market, because of local governmental aid to their competitor(s).

It has even been argued that the current financial crisis was directly caused by the

growing protectionist sentiments of the U.S. and China. As nations with huge deficits

such as the U.S. began to borrow from nations such as China, Asian consumers saved

their money out of fear of failure in foreign or direct domestic investments. These

“savers” feared that as a result of protectionist aid in invested nations deficit nations, that

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they would lose their investments. Because of this fear these prior investors became

savers and did not spend money as they had, but instead saved massive amounts of

money. Most of these lender Asian nations did not have the financial market capabilities

of the West, such as banks and lending centers. As such the money became pooled in

U.S.’s established financial sector and U.S. banks. These U.S. banks in turn received

huge amounts of money from Asian savers.

These banks had huge amounts of money and were able to give out lots of loans at

relatively low interest rates. This created a situation in which consumers saved little

money and loans were more easily given to unstable borrowers. These borrowers were

unable to pay back their loans. In turn these firms were unable to withstand the massive

outflows of money that ensued and these huge financial centers collapsed.

Had protectionist sentiments been avoided, it is believed that these Asian lending

nations would have instead “spent” their money rather than saved it. In turn the money

would have been invested in the market or domestic growth, as well as direct foreign

investment through business transactions rather than bank lending.

U.S. Deficits and Chinese Trade Surpluses

Another point of trade contention between the U.S. and China has become the

U.S.’s rising financial deficient. As of 2008 Chinese holdings of U.S. Treasury Securities

fell around $700 Billion. This deficient is further increased when Chinese holdings in

U.S. aided third world counties are compounded. In truth the U.S. actually owes another

$150-200 Billion to China; based upon its promises of aid to developing nations (Prasad

2009).

This deficient has further sparked protectionist sentiments by U.S. citizens. It has

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also given the Chinese unprecedented influence over U.S. policy decisions. The U.S.

must be cautious in the policy decisions it makes while the deficit is so heavily controlled

by the Chinese. These “cautions” must extend to U.S. policy when dealing with the

possibility of undervaluing the dollar when compared to the Yuan as well as U.S.

protectionist legislation.

The U.S. and Chinese Future Energy Crisis

The Chinese have grown at unprecedented rates over the past few decades since

the Cold war Era. As a result the Chinese have placed greater strain on not only product

competition with the U.S., but also energy allocation and finite resources. These finite

resources include materials such as copper, nickel, iron and aluminum; as well as fossil

fuels such as oil and natural gas.

The Chinese need vast amounts of these resources and the need only becomes

greater every year. In 1990 China accounted for 7% of the worlds copper, nickel, iron,

and aluminum needs. By 2000 the accounted for over 15%. Today that need has grown to

over 20% and it is predicted to increase by at least double within the coming decade. The

Chinese have also been large importers of oil. As of 2004 the Chinese accounted for 31 %

of global energy demands and this need has only continued to grow (Zweig,Jianhai p25-

26).

As a result of this growth it has become increasingly more important for the world

to regulate China’s economic impact. It also means that it has become increasingly

difficult for U.S. companies to bargain for the same finite resources. The demand has

grown on these resources as such so has the price. This demand becomes increasingly

more difficult to achieve as the resource stocks dwindle as all finite energies do.

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As such conflict between the U.S. and China on energy reform, becomes

inevitable. As both nations compete for the same resources tensions rise and economic

growth rates face risk. This possibility becomes even more compounded for the U.S.

when the policy decisions the U.S. makes must be weighed alongside the rising deficit

decisions.

This lack of energy resources also places the U.S. in stark national security

possibilities. How can the U.S. sustain military strength and protection; when resources

become thin and economic troubles arise? Furthermore, how can the U.S. attain national

interests, if so much of the U.S. economy is bounded by foreign entities such as the

Chinese?

Conflict seems inevitable, unless the U.S. and Chinese can achieve trade policies

that not only benefit both, but also begin to work towards “green” possibilities. The

Chinese government has made large bounds in the area of “green” technology; as such

they appear to be on the cutting edge when it comes to possible future trade capabilities.

Currently China has been on the cutting edge in wind technology. From 2006-

2009, China was able to consecutively double their wind turbine output of the nation

every single consecutive year. It is also predicted that if the Chinese continue these

investments, the nation could be the largest supplier of wind energy in the world, as well

as the largest supplier of wind based energy technology (China's wind-power potential p

1). This investment in renewable energy could give the Chinese economy unprecedented

competitiveness over the U.S. in terms of energy capabilities, unless the U.S. is able to

also reform its sustainable energy capabilities.

Despite the possible abilities created through “green” energy, by the Chinese

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government; trade relations have become strained. The Chinese have passed legislative

practices that only implement “green” technology if the company that produced it is 51%

or more Chinese own.

As a result of this legislation many nations feel that the Chinese have violated the

charters of the WTO as well diminished the capabilities of the Kyoto Treaty. The Chinese

have a possibility of creating vast amounts of “green” technology which they can in turn

export to the rest of the world. Despite this they may in turn create a situation through

which their own protectionist sentiments stir protectionism in other nations; including the

U.S. If this is the case, China may lose out on exporting their “green” technology to other

nations (China's Wind-Power Potential p 1).

In order to continue to compete with the Chinese, the U.S. must start to invest

more heavily in alternative fuels and “green” technology. If finite fuels continue to

deplete, these alternatives will be necessary. If the U.S. waits until an energy” crisis, then

the Chinese will have a huge economic and competitive advantage. “Green” technology

will be the future of economic growth. Without this competitive advantage the U.S. will

struggle in all sectors of the economy. Finite fuels will become more expensive, as such

so will products. Whereas a renewable energy based economy will be able to limit rising

prices as they will rely far less on finite fuels. Furthermore the nations that become

renewable based energy economies will be able to sell their excess energy capabilities

across the world and make huge profits. These economies will also be the driving force

behind future globalization policy, as other nations rely upon their nation’s strengths.

Conclusion

The U.S. and China both gain from the trade growth exhibited in both nations. As

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such both nations should avoid legislation and policy decisions that lead to protectionist

sentiments. These sentiments only discourage competition and instead create stagnation,

inefficiency of the market, increased product prices, and market instability.

Instead both nations should encourage a free market enterprise that works to

create competition among Chinese and American firms. The U.S. should encourage

policies that make the U.S. a more competitive nation rather than create protectionist

policies. Invest in domestic education to make the American worker more competitive.

Invest in infrastructure to make the U.S. more appealing to companies and Multinational

Corporations. Invest in renewable energy programs that encourage a more efficient

energy system as well as market stability as these resources remain more constant than

their finite counterparts.

The Chinese should also pursue these same policies. They should work to

maintain strong relations with the U.S., in order to encourage export growths. They

should also continue to encourage internal demand as a way to not only stabilize their

own market systems, but also encourage more foreign investment as companies look to

pursue Chinese consumers.

The Chinese and the U.S. should both discourage lowering the value of the dollar

compared to the Yuan. As this would only create market stability and aggravate trade

relations. This would also create further hostility with the Chinese in the discussion of the

U.S. financial deficit.

The stability of the U.S. and Chinese trade market only creates growth and

prosperity for both nations. Any change in this stability would only create challenges for

both U.S. and Chinese firms, as such protectionist legislation should be avoided above all

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other pursued trade policy.

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Bibliography

Anonymous, . "China's wind-power potential. " Nature 457.7228 (2009): 357-357. Research Library, ProQuest. Web. 27 Nov. 2010

Hale, David, and Hale, Lyric. “Reconsidering Revaluation: The Wrong Approach to U.S. Chinese Trade Imbalance.” Foreign Affairs (2008): 57

Jeffrey D. Sachs; Howard J. Shatz; Alan Deardorff; Robert E. Hall. “Trade and Jobs in U.S. Manufacturing.” Brookings Papers on Economic Activity, Vol. 1994, No. 1. (1994), pp. 1-84.

Morrison, Wayne. “China-U.S. Trade Issues.” Congressional Research Service(2010), Summary pp. P 2, 12, 14-22.

Prasad, Eswar. “Effect of the Financial Crisis on the U.S.-China Economic Relationship.” Cato Journal (2009)

Zweig, David, and Bi Jianhai. "China's Global Hunt." Council on Foreign Relations 84.5 (2005): 25-38