Despite their major structural differences, China and the United States are among the world’s largest and most influential economies. The economic and trade relationship between these two countries has a potential to impact the development and growth of the global economy. It is important to have a good understanding of this topic, as it touches every individual on the planet. In this paper, I will provide a thorough explanation of the current economic and trade policy between these two countries and suggest the best policy to move forward.
In 2016, the gross domestic product of the United States of America was 18.62 trillion USD, while same economic indicator for China was at 21.29 billion USD. On the other hand, the GDP real growth rate in the same year was 6.7 percent for China and 1.5 percent for the United States (Central Intelligence Agency). Also, when talking about economic differences between the United States and China, it is important to consider the composition of these economies. The economy of the United States is primarily based on services (80.2 percent); industry accounts for 18.9 percent of the economy and agriculture for 0.9 percent only. On the other hand, the composition of China’s economy is drastically different and more equal: it is also primarily based on services (42.4 percent); however, the importance of the other two components is also significant: industry accounts for 29.3 percent of the economy and agriculture for 28.3 percent (Central Intelligence Agency).
Another component that is valuable for understanding the economic and trade policy between these two countries is the import/export breakdown. In the case of China, 18.2 percent of its exports go to the United States, 13.8 percent to Hong Kong, 6.1 percent to Japan, and 4.5 percent to South Korea. On the other hand, 10 percent of the country’s imports arrive from South Korea, 9.2 percent from Japan, 8.5 percent from the United States, and 5.4 percent from Germany (Central Intelligence Agency). The current account balance of China is positive 196.4 billion USD. In the case of the United States, 18.3 percent of its exports go to Canada, 15.9 percent to Mexico, 8 percent to China, and 4.4 percent to Japan. On the other hand, 21.1 percent of the country’s imports arrive from China, 13.4 percent from Mexico, 12.7 percent from Canada, and 6 percent from Japan. The current account balance of the United States is negative 451.7 billion USD. The abovementioned figures reveal an important insight: thought being beneficial for both parties, strong US-China trade relationships are more necessary for the former country.
China has a relatively well-diversified export/import portfolio, the country’s economy is growing and balanced. Furthermore, it exports significantly more than imports; primarily, because firms realize their profit-maximizing objectives and capital flows to countries with the lowest relative cost of production, as suggested by several theories of international trade (Jensen, Bjarne). On the other hand, the GDP real growth rate of the United States suggests that the country’s economy has reached its ceiling. Furthermore, as it is primarily based on services, the restructuring of the economy will not boost growth, but the country could rather achieve growth through innovation. Innovation in the economy is closely related to research and development capital inflows; hence, improving US-China trade and economic relationships could help the United States to boost innovation by attracting the excessive capital that Chinese are currently enjoying due to the high rate of economic growth.
Recently, Donald Trump threatened to impose restrictions on Chinese imports in an attempt to lower the trade deficit with China (Amadeo, Kimberly). In 2016, the deficit figure was 347 billion USD. The United States exports to China were only about 116 billion, while its imports were at 463 billion USD. It happens primarily due to China’s low standard of living, which allows paying the country’s workforce lower wages. Hence, while China itself manufactures a lot of cheap consumer products, it is also extensively used by the United States firms as a low-cost assembly. Kumar, DuFresne, and Handler support this proposition by confirming that US manufacturers have been outsourcing their production to China for the past twenty years to take advantage of low labor costs. Despite benefiting American firms, this trend creates significant supply chain risks for the US economy.
Thus, the trade deficit reflects not only the difference between imports and exports of Chinese companies but also the U.S. firms’ flows of assembled products. Another important consideration in the US-China bilateral economic relationships is the yuan exchange rate that is partially fixed to the dollar. Donald Trump has argued numerous times that the yuan exchange rate is artificially devalued, which helps to enhance the attractiveness of Chinese exports. However, Amadeo argues that it is not the case, as in 2006, Hank Paulson, the former Treasury Secretary, convinced the central bank of China to strengthen the value of yuan against the dollar. During the period 2000-2013, it increased at an annual rate of 2-3 percent.
Glaser stresses the complexity of the US-China relations. The author suggests that, though the confrontation between the two states is not inevitable, it is still possible that China and the United States will not be able to sustain a productive relationship due to major differences and issues, including the economy. There are several economic issues that are currently the cornerstone of disagreements between two countries.
First, denuclearization of North Korea and the associated economic sanctions. Glaser suggests that the United States support Iran-like sanctions on North Korea, which would cripple the economy and force the country to abandon the nuclear program. On the other hand, China opposes this strategy as it is likely to cause instability, which could spill over China’s borders. This disagreement is likely to increase US-China bilateral tensions.
Second, cyber espionage. China’s use of cyber for economic espionage has been condemned by the US government. The Obama administration warned China of the consequences if it continued using cyber to steal the intellectual property of the American firms.
The rest of issues that are likely to have a negative impact on the bilateral relationship between the United States and China are political rather than economic. However, Glaser also warns of the risk of US-China strategic competition. If Chinese were to believe that the United States was seeking to contain China, they would likely revise their foreign policy. However, in the light of the Trump administration’s recent promises, this risk becomes increasingly more evident.
Brantly Womack suggests that the relationship between the United States and China should not be viewed as a win-lose situation. Instead, the author proposes that the countries must focus on a sustainable rivalry – a condition when each party maximizes the long-term absolute gain instead of its gain relative to the other. He believes that uncertainty must be managed through negotiation, as neither of the countries is an omnipotent ‘hyperpower’ with a potential to design the world order. The structure and context of global power have changed. Both the United States and China must accept this fact and change their perspectives. Womack stresses that future developments of the bilateral relationship between the United States and China will dictate the global economy for the foreseeable future. Hence, by choosing non-cooperative strategies, the United States and China will not only alter their individual economic growth rates but also will have a significant negative impact on the global economy.
I strongly believe that Womack’s take on the US-China economic and trade policy is the best option. Both the United States and China need to change perspectives on global dominance and power. The world has changed dramatically. It has become increasingly more interconnected. Hence, the only way for countries to choose the most efficient equilibrium is by following a cooperative strategy. The United States government should blame the Chinese less and focus more on improving its economy. Each country uses its comparative advantage and, as suggested by the several international trade theories discussed in this essay, the fewer obstacles to trade, the more each of them can gain in absolute terms.
In conclusion, this paper discusses current economic and trade policy between the United States and China. It presents the overview of current economic reality in regard to the relationship between these two powerful countries. Having presented several stands on the US-China trade policy, including the one adopted by the current US government, I strongly believe that the best way to move forward is by choosing a cooperative strategy, leaving differences aside and using the countries comparative advantages, as suggested by international trade theory.
- Amadeo, Kimberly. “Why America’s Trade Deficit With China Is So High.” The Balance, 2017.
- Central Intelligence Agency. The World Factbook. 2017.
- Glaser, Bonnie. “US-China Relations Managing Differences Remains An Urgent Challenge.” Southeast Asian Affairs, 2014,.
- Jensen, Bjarne. “Comparative Cost And Factor Endowments: Ricardo And Ohlin.” Positive And Normative Analysis In International Economics, 2012.
- Kumar, Sameer et al. “Managing Supply Chain Risks In US-China Trade Partnership.” Information Knowledge Systems Management, no. 6, 2007.
- Womack, Brantly. “Asymmetric Parity: US–China Relations In A Multinodal World.” International Affairs, vol 6, no. 92, 2016,.