Thesis statement
United States trade with China has grown significantly since the year 1979. This has led to an increase in both exports to China and imports from China. Although there have been negative consequences on the US economy, trade with China brings more good than harm to both China and the US.
Introduction
The past three decades have seen substantial growth in US-China trade. Since the US and China formally established diplomatic relations in 19179, the total trade has increased from $2 billion to $591 billion in 2014. China has risen to become the second-largest trading partner of the United States. China is US largest export market and the largest source of imports in the US. There have been debates on whether the expanded trade with China benefits the US economy or not. Opponents have argued that it brings more harm than good to the United States economy. This paper highlights the benefits and disadvantages of US-China trade.
Benefits of US trade with China
Increased trade with China has led to an increase in US exports. According to the 2013 statistics, China was the third-largest export market for the United States. 2013 exports to Chine totalled $122.1 billion, a 10.4% increase from 2012. This accounted for 7.7% of the total US exports during the year. The Chinese market is also the fastest-growing market for US exports hence it is key to the US economy. US exports to China had grown by 536% since 2001 when China joined the World Trade Organization. An increase in exports to China has improved the profitability of American businesses, among other benefits to the economy. Several US manufacturers have invested in China and have recorded increases in revenue. A large percentage of US exports to China is composed of capital-intensive products. Boeing is one of the US corporations that have benefited from the increased trade with China. Since 1980, the company has sold over 600 jumbo jets worth millions of dollars to China. This has not only benefitted the corporations but the US economy as a whole. The millions of dollars of revenue from the Chinese market has contributed to several new jobs in the United States. In each year from 2010 to 2014, General Motors, A US firm, sold more cars in China than in the US (Office of the United States Trade Representative).
Trade with China has also benefitted consumers in the United States through low-priced products. According to the theory of comparative advantage, bilateral trade enables consumers in both countries to access goods at lower prices. China has a comparative advantage in labour-intensive products while the US has a comparative advantage in capital-intensive products. The average wage for a US worker is between $18-20 per hour while a Chinese worker earns about $1.50 per hour. This implies that labour-intensive products produced in America are more expensive than those produced in China. Therefore, trade with China has enabled US consumers to buy labour-intensive products at lower prices than what they would pay if they had been buying from the US manufacturers. An example is the shoe market in the US that has seen a decline in sales by American manufacturers. In 1976, 53% of the shoes worn in the US were of American manufacturers. By 2006, it had gone down to only 1.5% as American consumers switched to cheaper imported shoes. 80% of the shoe imports are from China. This has improved the living standards of Americans.
The US trade with China has also led to an increase in US investment in China. In 2012, US foreign direct investment was $51.4 billion, 7.1% up from 2011. Manufacturing, wholesale trade, insurance, banking and finance sectors are the leading US direct investments in China. On the other hand, Chine foreign direct investment in the US totalled $5.2 billion in 2012, a 38.1% increase from 2011 (Office of the United States Trade Representative). In 2011, sales of majority US-owned affiliates in China were $35.2 billion while sales by majority China-owned affiliates in the US were $1.4 billion. Most of the American businesses in China are making profits which are then remitted to the United States. Besides, it is estimated that US firms in China produce about 40% of US imports from China.
It has also enabled some US firms to reduce the cost of production. US firms operating in China, especially those producing labour-intensive products, enjoy the low cost of labor thus reducing their production costs. Some US firms use China as the final assembly point to enjoy the low cost of labour. Besides, other firms use low-cost Chinese inputs for production in the United States. This, coupled with cheaper imports, has reduced inflation in the United States.
The increase in US exports to China and other countries has led to the creation of employment opportunities in the US. In 2013, US exports of goods and services supported over 11.3 million jobs. Each billion dollars of exports of goods supports about 5,600 jobs while every billion dollars of exports of services supported 5,900 jobs in the US (Office of the United States Trade Representative). Exports contributed to about 25% of all manufacturing jobs while US agricultural exports supported 929,000 jobs (Office of the United States Trade Representative). With exports to China contributing about 7.7% of total US exports, US trade with China supports a substantial number of jobs in the United States.
US trade with China also assists in keeping US interest rates low. The US operates a deficit budget hence relies on borrowing to finance government activities. It sells Treasury securities both domestically and to foreign investors. A large domestic borrowing crowds out private investment by reducing the supply of loanable funds. Therefore, interest rates increase if there is extensive domestic borrowing by the government. China purchases US government debt securities. It is the largest of all the foreign holders of US Treasury Securities. As of September 2015, China held about $1.26 trillion of US Treasury Securities. This reduces domestic borrowing by the US government thereby keeping US interest rates low.
Conclusion
The trade between the US and China has benefitted the two countries. US exports to China have increased thereby creating employment opportunities in the US economy. Besides, foreign direct investment by US firms in China has also increased with most US firms operating in China making profits. Consumers in the US have benefitted from low-cost goods from China while producers in the US have befitted from low-cost inputs from China. US firms using China as the final assembly point have also gained from the low-cost labor in China. However, it has not all been rosy for the US economy. While US exports to China have grown, its imports from China have increased at a higher rate. It has resulted in an increase in the trade deficit. According to the US-China Economic and Security Review Commission, the trade deficit with China reached $365.7 billion, a record high, in the third quarter of 2015 (Uscc.gov). There are still several issues to be resolved including China’s incomplete transition to the free market, support for state-owned enterprises, investment barriers, manipulation of eth exchange rate, among other issues (Morrison 30). Trade is beneficial to both economics as the benefits outweigh the costs. Resolving the above issues will enhance a balanced trade between the US and China.
Works cited
"Benefits Of Trade". Office of the United States Trade Representative. N.p., 2016. Web. 29 Mar. 2016.
"RESEARCH: Economics And Trade REPORTS | U.S.-CHINA". Uscc.gov. N.p., 2016. Web. 29 Mar. 2016.
"U.S.-China Trade Facts". Office of the United States Trade Representative. N.p., 2016. Web. 29 Mar. 2016.
Carbaugh, Robert J. International Economics. Cambridge, Mass.: Winthrop Publishers, 2008. Print.
Morrison, Wayne M. China-U.S. Trade Issues. Congressional Research Service, 2015. Print.
