The United States And China: A Growing Trade Imbalance

1704 words - 7 pages

Between 1949 and 1972, there was no trade between the United States and Mao’s Communist China. In late 70s, China went through economic reforms and global trade increase ten times. Since the late 80s, United States has had a bilateral trade deficit with China; annual deficits increase throughout the 90s, and increase rapidly in the first half of the 21st century (C. Fred Bergsten,Bates Gill, Nicholas R. Lardy, Derek J. Mitchell, 2006). At the beginning of 2008, America and China are each other’s second largest trading partner, while China has replaced Canada as the largest exporter to the United States. Today trade deficit with China is 28 times larger than it was during the Reagan era, ...view middle of the document...

(USCBC, 2011) The largest U.S. exports to China were computers and electronics, crop production, chemicals, transportation equipment, and non-electrical machinery.
Is China’s low wage-advantage responsible for its enormous trade surplus with the United States? China’s low-wage advantage does provide some advantage in international trade, but the huge number or U.S. imports from China are in labor-intensive products (toys, apparel, shoes, furniture)—industries that have largely moved outside of the U.S. for many years. It is not doubts that Chinese export beating out U.S. exports of the same goods. But on the other hand, U.S. export to China skill- and capital-intensive goods such as semiconductors and microprocessors, aircraft, machinery, and petroleum, which need skilled labor for production.
But how long will China serve as a low-cost provider of the most commodified pieces of production? From 1995 to 2005, China’s investment in research and development increased nearly 20 percent per annum, a rate that researches at the Organization for Economic Co-Operation and Development justifiably term “stunning” (OECD, 2006). China spent just over $136 billion on R&D in 2006, just over Japan’s forecast $130 billion. The United States remained the world’s leading investor in R&D in 2006, spending just over $330 billion. The EU-15, which includes France, Germany and the UK, is predicted to spend just over $230 billion (OECD, 2006). More striking than Chinese efforts to “go out” have been foreign efforts to “come in”. The world’s leading technology companies have scrambled in recent years to initiate R&D operation in China. Microsoft, Intel, Google, Nokia, Ericsson, and many others now run major China-based research centers. In 1997, there were only 24 foreign –owned R&D centers across all of China, but by 2007, there were 1,140 (Steinfeld, 2010).
In 2011, China’s shift away from labor-intensive manufactured good toward capital- and technology-intensive products, which is less driven by wage rates, especially for low-skilled workers, and is far more dependent on investment in advanced technology content. Chinese exports included power generation equipment, industrial and electrical machinery, and data processing equipment. Chinese exports in the nine categories totaled $356.7 billion in the first half of 2011, which is 41 percent more than U.S. export of $252.1 billion (Preeg, 2011). Also, Chinese companies are increasingly off-shoring lower value manufacturing to counties such as Vietnam and Bangladesh, where labor rates are lower.
Is China’s undervalued currency responsible for the huge trade imbalance? Because an undervalued yuan makes China exports cheaper and American exports more expensive, the currency revaluation may lead to some decrease in the U.S.-China trade imbalance, but not by nearly as much as most people anticipate. Since 2005 when the yuan has risen in value about 20 percent relative to the U.S. dollar, however,...

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