U.S. and China Trade Relations

China’s entrance into the World Trade Organization (WTO) in 2001 was met with protests and resistance from some groups, particularly human rights organizations. Many businesses saw expansion into China as a tremendous opportunity. Today, as a nation, we are examining our trade relationship with China more closely. A major campaign issue in the upcoming 2004 election will be the economy. Politicians are putting much of the blame on trade deficits with China. Currently, there are at least 6 bills being considered in Washington, D.C. that relate to trade with China.

Current trade between U.S. and China

The United States has many reasons to hope for more even trade with China. The republic’s 2002 population estimate of 1.28 billion people constitutes approximately 20 percent of the world population (1). Despite China’s large population, U.S. companies have a difficult time gaining access to the market because of tariffs and other quotas. Also, the low labor cost in China translates into lower costs of production than in the United States. The wage rate in China is approximately one fortieth of that in the U.S. (2) For this reason, goods manufactured in China and shipped to the United States are less expensive than their American-made counterparts. These factors help to explain the following observations on current trade inequities:

* The 2002 trade deficit between the U.S. and China was $103 billion (3).
* The pace for the 2003 trade deficit is 22 percent higher than at this point last year (3).
* For every $1 in American-made products sold in China, $6 in Chinese-made products are sold here (3).
* Chinese exports to the United States have tripled since 1995 (4).

Manufacturing job losses to China

Policy makers are examining the United States’ trade with China. Many claim that currency valuation practices used by the Chinese government are unfair. China’s currency has been held steady at 8.3 yuan to the dollar since 1995. One vocal opponent to China’s current monetary policy is N.C. Senator Elizabeth Dole. Senator Dole commented that many of the state’s employment problems can be directly attributed to trade with China. In fact, she helped introduce a bill to put a tariff of 27.5 percent on all Chinese imports (4). Whether such a measure would solve the problem, or reverse the movement China has made to lower their tariffs, is a still a topic of debate.

Recently, Federal Reserve Chairman Alan Greenspan took a different position than Senator Dole. While he acknowledges that manufacturing job losses can be traced to China, he feels that if China were not absorbing these jobs, another country with labor rates lower than the U.S. would be. He also pointed out that in the past, textiles in particular, were often manufactured in other countries in East Asia. With the low cost of operation in China, many of these processes have been moved to the Republic. As a result, many of the job losses in the textile industry have been in the other countries, not only the U.S. Greenspan also emphasized that it is in China’s best interest to allow the yuan to float freely, rather than tied to the dollar. The current policy will result in inflation for the country (5).
China has become a popular political target for many reasons:

* Approximately 2.7 million U.S. manufacturing jobs lost since 2000 have been in industries that are importing more from China(4).
* China is the world’s top destination for foreign investment (4).
* China’s economy has not dipped below 7% growth for years, while U.S. growth has been lower (4).

The future of trade relations between China and the U.S. is yet to be determined. The two economies are extremely interrelated. One wildcard thrown into policy decisions is in the agreement to allow China into the WTO. U.S. decision makers have broad powers to block Chinese-made products from surging the market. As part of this deal, the U.S. does not need to provide any proof of wrongdoing on the side of the Chinese (6).

References:

(1) China Population Resource Center

(2) Hennock, Mary. “U.S. sees red over China.“ BBC News, December 9, 2003

(3) Crutsinger, Martin. “Bush Accused China of Manipulating Trade.” Associated Press, October 14, 2003.

(4) Kinzie, Susan and Ranii, David. “Dole blames China for N.C. trade woes.” News and Observer. October 14, 2003.

(5) Ip, Greg. “Fed Chief Takes Opposite China View.” Wall Street Journal. December 12, 2003.

(6) Forney, Matt. “Tug-of-War over trade“ Time Magazine. December 15, 2003.