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Posted on August 19th, 2012, by

In 2008 United States has got its largest bilateral trade deficit with China   -268,039.8 billion, and for October 2009 the trade deficit of US-China trade was -188,464.4 billion.  From 2003 China is the second largest source of imports for the United States. Over the past five years, China has been the fastest growing market of US export. Also, the United States is China’s largest overseas market as well as the second largest source of foreign direct investment. U.S. exports to China have been growing rapidly year by year.

The U.S. trade deficit with China is notable for not only its size but also the large imbalance between imports from and exports to China.

For more and more consumer goods, China is surpassing the United States as the world’s biggest market from cars to refrigerators to washing machines, even desktop computers. More and more people try to understand is the economical growth of China the treat to the economics of the USA.

At a press conference on Thursday, November 19, 2009, the Senate of the USA will hear the report regarding the current position of China economics. Among its topics are the following:

–       the aggressive espionage efforts to obtain U.S. secrets and technology;

–        cyber espionage that treats to  U.S. computer networks;

–        aggressive propaganda and the  efforts to influence public opinion in the United States;

–        China’s policy of foreign investment attraction, and creation of national championship

–        creation of the economic imbalances  and the financial crisis as the result;  and so on.

I tried to understand if the China’s growth really treats to US economics and welfare.

China’s growth comes from state investment in infrastructure and heavy industry as well as private sector expansion, whose role in the economy was significantly overestimated. Many global corporations were interested in the entering to China market, but they were concerned about  the competition with low-cost China production. That is why the China membership in WTO will be limited for the first 15 years, to 2016.  In spite of this it is evident, that WTO membership gave to China a number of advantages as to market and as to producer.

However, from 2004-2005 the economical growth of China became slower.  The new politics of China government had the positive impact not only on China, but also for on global economy. China’s current account surplus has soared,  nevertheless, China still is a major contributor to global economic imbalances as well as the United States with its the world’s largest current account deficit.

Some economists are rather optimists as for the current situation on China-US economic relations. Thus, Dr. Howard Richmond said:

The joint strategy of the American and Chinese leaders is working well. American leaders get to congratulate each other for engaging in unilateral free trade, even though we could get out of the worldwide recession by balancing trade. Chinese policy leaders get to steal market share from American industry throughout the recession so that they can dominate the world’s future afterwards, replacing the hegemony of democracy with the Chinese brand of market totalitarianism. It’s a win-win situation for the leaders of both countries! (Richmond, 2009)

However not all economists are such enthusiastic.  Thus, Clyde Prestowitz, founder and President of the Economic Strategy Institute, declares:

This kind of trade is not win-win. Rather it is a classic zero-sum game. It is well-known to game theorists that in such situations a tit-for-tat response is the optimal strategy. Unilateral acquiescence to the aggressive initiatives of another player (the orthodox unilateral free-trade response) is a sure way to lose. (Prestowitz, 2009)

Prestowitz, reminds that the similar pessimistic forecast he has made before:
This kind of situation was anticipated when China negotiated its entry into the World Trade Organization along with most-favored-nation treatment from the US. These deals specifically called for tariffs on China’s exports if they surged in ways that disrupted US industries.

Between 2004 and 2008, US imports of Chinese tyres rose 215 per cent while US production fell by nearly 27 per cent and 5,000 US tyre industry jobs were lost. The ITC says China is not engaging in standard free trade and that its actions meet the established criteria and justify imposition of tariffs under the agreed international rules. (Prestowitz, 2009)

Today, the outer U.S. debt continues to mount, and financial and economic risks also escalate. This could lead to a hyperinflation and decline of interest rates.  This can hammer bond values, including the Treasuries held in such large quantities by China.

Without a hard push from the United States changes in China’s policies are likely to be delayed, and that will not be good for the United States and the rest of the world. China also has its own interest, because without a shift away from heavy dependence on investment China will not be able to continue rapid economic growth.  The tasks of the United States to make Chinese government fully realize this.

During the first visit of President Barack Obama to China neither appears particularly comfortable with the arrangement, but neither sees a good alternative, The Washington Post reports. (WP, 2009)  The U.S. needs China’s money, China needs US consumers.

The  theory of Heckscher-Ohlin, Noble laureate in Economics and former Secretary of Trade of the Swedish Government, says that two countries trade goods with each other  (and thereby achieve greater economic welfare), if the following assumptions hold:

    The major factors of production, namely labor and capital, are not available in the same proportion in both countries.

    The two goods produced either require relatively more capital or relatively more labor.

    Labor and capital do not move between the two countries.

    There are no costs associated with transporting the goods between countries.

    The citizens of the two trading countries have the same needs. (Heckscher, 1977)

It is obvious that almost all these factors are present now in the economical relations between US and China.  That is why within the following next decade the economics of both countries will trend to active trade and economical interrelation.

We are in a fairly advanced stage of economic mutual interdependence, said Kenneth Lieberthal, a specialist on China at the Brookings Institution. I think the Chinese can pull the rug out from under our economy only if they want to pull the rug out from under themselves. (WP, 2009)

As was stated above, the interdependence and the mutual benefits do not prevent both countries from being deeply suspicious of each other’s intentions.

At this point, no one can say China and the United States are friends, said Yan Xuetong, director of Tsinghua University’s Institute of International Studies. It’s better to say we are competitors, like McDonald’s and Burger King are competitors, Yan said. McDonald’s wants to open more shops, not destroy Burger King and in the process destroy itself. Why would we be so silly as to hurt ourselves? (WP, 2009)

It is obvious that the interdependence may ease slightly without any dramatic moves. The trade surplus of China is coming down gradually.  One effect of the prolonged recession is that the citizens of the USA are saving more, so there is no need U.S. government to sell securities  and to increase the trade debt anymore.

Conclusion

The economical success of China over the past 28 years is considered to be an economic miracle. From a poor and isolated country China came to the world’s second-largest economy. Although China’s integration into the world economy was warmly welcomed, such an economic superpower threatens to the economy of the USA. The most popular ideas are the following:

–       China’s rise  is equal to decline in U.S. economic power;

–        China’s economic policies (undervalued currency and low wages) threaten U.S. jobs, wages, and living standards.

It is important to remember that China’s economic growth is the result of commercial ties between it and the United States.

The forecast for China is the following: the fast economical growth will ruin the trade and investment barriers. Within the following decade China will the USA and become the world’s largest economy. However if the China’s rise get influence in U.S. living standards, the impact of this influence will be insignificant.

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