Over the past few years, trade relations between China and the United States have changed significantly as a result of Chinese manufacturers’ ability to produce a wide range of goods at remarkably competitive prices. As can be seen from the graph below, in 2012 the US-China trade balance amounted to US $ -315,1 billion and kept growing steadily until 2015, when a series of measures implemented by the United States led to a decrease of such deficit to US $ -225,2 billion.
Simply put, the US-China trade deficit exists because the United States import large amounts of clothes, electronic products and machinery from China. In order to exploit China’s competitive labor costs, many US firms send raw materials to China to have them assembled there. When such products are then sent back to the United States, they are considered as imports even though they benefit local companies, which is one of the reasons why the US-China trade deficit has been growing considerably over the past decade. In view of China’s rapid and impressive economic growth, many financial analysts have attempted to identify the main reasons behind the country’s increasingly successful exports.
As reported by Amadeo (2016), China’s lower living standards and smart exchange rate policy (thanks to which the government manipulates the Yuan in such a way to ensure that it is always significantly lower than the Dollar, as well as other currencies such as the Euro) are primarily responsible for the country’s competitive pricing. Being Chinese firms’ manufacturing costs extremely low, most US firms find it difficult, if not impossible, to compete against them, which is why many of them have been left with no choice but to cooperate with their rivals by having their goods made in China.
With regards to the advantages and disadvantages of such a large trade deficit, it is important to keep in mind that both China and the United States have been affected by their increasingly intense trade relations. On the one hand, China’s total export revenue has grown significantly – suffice to say that in 2015 its exports to the United States amounted to US $483, 2 billion. In order to always prompt US firms to import goods from China, whenever the dollar loses value, China supports it by buying many US Treasury notes.
As a result of its economic policy, as of August 2016 the United States owed China $1, 18 trillion, which accounts for 30% of US debt held by foreign countries. While these figures appear to suggest that the US-China trade deficit has made China significantly stronger than the United States, it is worth pointing out that as one of America’s largest creditors, China’s economic health largely depends on how well the US economy performs. Moreover, by lending vast sums of money to the United States, China has been encouraging US firms to keep buying the products and services that it exports. Besides playing a key role in enabling the United States to overcome the recent economic recession, China’s “generosity” has obviously had a positive impact on the Chinese economy, leading to significant job creation and GDP growth. As Presidential Candidate Donald Trump put it in a recent interview (Belvedere, 2016), much of China derives much of its current economic strength from manufacturing producers for US firms and shipping large amounts of goods to the United States. It follows that without the United States, China would certainly experience a sudden decrease in export revenue.
In conclusion, the US-China trade deficit has made United States and China remarkably inter-dependent, which means that in the future, both economic powers will have to keep cooperating and supporting each other in order to avoid unpleasant consequences that would have a negative impact on both countries.
- Amadeo, K. (2016). Why Is the U.S./China Trade Deficit So High?. Retrieved from https://www.thebalance.com/u-s-china-trade-deficit-causes-effects-and-solutions-3306277
- Belvedere, M.J. (2016). Trump: America has leverage over China because it owns so much US debt. Retrieved from http://www.cnbc.com/2016/09/12/trump-america-has-leverage-over-china-because-it-owns-so-much-us-debt.html
- United States Census Bureau (2016). Trade in Goods with China. Retrieved from https://www.census.gov/foreign-trade/balance/c5700.html