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U.S.-China Trade Imbalance

Here is a good article that has posted by UCLA Asian American Studies Center. We would like to share it with our viewers 

importupSince 1784 when the first American cargo ship the Empress of China set sail for Canton with a shipment of ginseng, trade between the United States and China has waxed and waned, except for 22 years between 1949 and 1972 when there was no trade between the U.S. and Mao's Communist China. Since economic reforms in late 1970s, China's share of global trade has grown tenfold.

The U.S. has had a bilateral trade deficit with China since the late 1980s; annual deficits increased throughout the 1990s, and skyrocketed in the first half of the 21st century. At the beginning of 2008, America and

China are each other's second largest trading partner, while China has replaced Canada as the largest exporter to the U.S (China is America's third largest export market). In 2007, the United States sent $65.2 billion worth of exports to China, and imported $321.5 billion worth of goods, running up a trade deficit of $256.3 billion, the U.S.'s largest trade deficit ever with a single country. U.S. lawmakers have threatened to slap tariffs and import duties on Chinese goods if China does not reduce its huge trade surplus with the U.S.

What accounts for the huge U.S.-China trade imbalance? Some of the most commonly cited explanations by critics include: i) China restricts access to its markets while aggressively supporting exports by its domestic firms; ii) China's low-wage/low-cost advantage; iii) China's artificially undervalued currency

Does China have import tariffs and quotas that restrict access to Chinese markets, thereby causing such a big differential between their exports and imports?

Although China did impose quotas and licensing requirements on many goods when it first opened itself to world trade in the 1980s the Chinese government had, by 2005, eliminated most import quotas, as per the terms of accession to the World Trade Organization (WTO) in 2001. A handful of agricultural products were exempt until 2007. And although China still has some import tariffs, they are relatively low and import tariff exemptions are widespread. Figures indicate the effective tariff protection provided to domestic firms in China is among the lowest of any developing country. The accusation that China is restricting its markets to the U.S. is belied by the fact that U.S. exports to China rose 300% between 2000 and 2007, and nearly every U.S. state has recorded triple-digit growth in exports to China since 2000.

Is China's low wage-advantage responsible for its enormous trade surplus with the U.S.?

China's low-wage advantage does provide some advantage in international trade, the huge number of U.S. imports from China are in labor-intensive products (toys, apparel, shoes, furniture) - industries that have largely moved outside of the U.S. for many years now. While China imports are only 7.5% of American spending on all consumer goods, they constitute 80% of toys, 85% of footwear and 40% of clothing that Americans buy. It is therefore not a question of Chinese exports beating out U.S. exports of the same goods. On a macro level, there is not too much overlap between Chinese and American production, as from the U.S.-China Business Council shows. If anything the U.S. exports to China of skill- and capital-intensive goods such as semiconductors and microprocessors, aircraft, machinery, and petroleum and iron-ore has the effect of raising the relative wages of skilled labor in the U.S. In the end, we are almost talking about apples and oranges here. It's just that we buy more of their apples then they buy of our oranges.

Is China's undervalued currency responsible for the huge trade imbalance?

Because an undervalued yuan makes China exports cheaper and American exports more expensive, most experts agree that some currency revaluation may lead to some decrease in the U.S.-China trade imbalance, but not by nearly as much as most people anticipate. It also may not reduce the U.S. global trade deficit. Some experts like Michael Pettis, professor at Peking University's Guanghua School of Management, believe that China's currency does affect the trade balance, not so much because of the impact of a stronger yuan on foreign demand for Chinese goods, but rather because of its impact on Chinese domestic monetary policy.

US China Trade Imbalance -- part II

US China Trade Imbalance -- part III