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Does Trade with Low-Wage Countries Cause a Trade Deficit in the High-Wage Country?
The United States Business and Industry Council claims in their website americaneconomicalert.org that the US economy is in a manufacturing emergency (USBIC To save American Manufacturing 1). They claim that the reliance on imports from third world countries with lower wages is threatening the survival of the manufacturing sector in the country. This perspective can be assessed using economic analysis.
The expenditure approach gives a mathematical formula for measuring the real GDP of an economy. Real GDP is the sum of personal consumption, domestic investment, government purchases of goods and services and net exports. Net exports are calculated as the difference between real exports and real imports . This formula breaks down the parameters necessary for analysis of the balance of payments account.
According to statistics from the US Department of Commerce (as cited by USCBC To save American Manufacturing 1), the US has maintained a trade deficit in its balance of payments with China since 2001. Both imports to and exports from China have increased over the years, but the increase in imports has been higher. The US remains China’s top export destination. A look at the list of sovereign nations ranked according to the current account balance reveals that even though some countries such as Japan and Hong Kong that trade with China have huge trade deficits, not all countries that import a lot from China and have relatively high wages have trade deficits. In fact some big importers like South Korea and Germany which have relatively high wages have trade surpluses (Wikipedia). This means that real import is not the only factor in the formula for real GDP that influences the balance of payments.
The reason for the US’s trade deficit with China is the fact that foreign investment exceeds local investment. A closer look at the composition of US imports from China reveals that the US imports more capital goods than consumer goods from China. The reason for this is because the US is an attractive investment destination. US locals are also saving less money, which therefore means that less money is available for investment. The US has not addressed this problem. China has maintained a peg of its currency on the US dollar while increasing the availability of the local currency by purchasing more US treasury bills. This has resulted in a reduction in value of the Chinese currency, therefore keeping Chinese capital goods relatively cheaper. This has also caused a reallocation of Chinese local resources to the manufacture of goods tradable with the US.
This economic analysis therefore show that the trade deficit with China is not caused by imports only, but is in fact a function of the difference between foreign and domestic investment. The claim by the United States Business and Industry Council is therefore cast in doubt. It is, however, interesting to note that the council is a not-for-profit organization representing the interest of American private and family companies (USBIC about us). These companies may find it hard to compete with Chinese multinationals which benefit from the relatively lower value of their home currency and a focus on exports. They may, therefore, require protectionism order to retain market share. The idea is noble, but relying on an economic study done by the council may mean relying on a biased opinion.
Works Cited
Diba, Behzad. "MACROECONOMICS: Saving, Investment, and the Trade Balance." 2004. Web. 3 June 2013.
Meltzer, Joshua. "The U.S. Trade Deficit, China and the Need to Rebalance Growth." 14 February 2011. Brookings Institution. Web. 10 June 2013.
United States Business and Industry Council. "about us." n.d. AmericanEconomicAlert.org. Web. 3 June 2013.
—. "TO SAVE AMERICAN MANUFACTURING: HIGHLIGHTS OF USBIC’S PLAN FOR AMERICAN INDUSTRIAL RENEWAL." 2006. AmericanEconomicAlert.org. Web. 3 June 2013.
US-China Business Council. "US-China Trade Statistics and China's World Trade Statistics." 2011. Web. 3 June 2013.
Wikipedia. "List of sovereign states by current account balance." n.d. Web. 3 June 2013.
