Trade between USA and China

Much had been said about trade deficit between USA and China. The crux of the argument is always that USA has been running a huge trade deficit against China over the recent years that this has becoming a problem. The fact that this has bothered some people is not manifested in visible impact on losing jobs but in perception of the reality. It is true that free trade always can trigger some job loss in certain industries. This is just how international trade helps the world to reorganize the capital and raw resources to produce goods and services more efficiently. Just as USA has lost some manufacturing jobs due to trade with China, India, Mexico, Canada, Japan, and the rest of the world, at the same time, trade has brought new jobs to the USA in the areas such as aerospace, electronics, entertainment, agriculture, and finances. So, it is wrong to say that free trade hurts middle class Americans as the increasingly annoying Lou Dobbs claims. If free trade hurts middle class Americans, then what about the jobs that are created by free trade. Are some jobs more important than the others? True that it is always painful to lose jobs but that is not the fault of the free trade. The society moves forward in the a market economy where the more efficient and more productive jobs are introduced while the less efficient and less productive jobs are either removed or transferred to low cost areas. That is just how the free market works.

So what about the trade deficit? USA has a huge trade deficit. That is not just against China but to the rest of the world. Mainland China while ran a trade surplus against US, also ran large and sustained deficit against Taiwan, sometimes with Korea and Japan. This is explained by the fact that mainland China has a large number of assembly plants that make final products out of parts made in Taiwan, Korea, and Japan. The end result is that the deficit that USA has with mainland China is partly transferred to these three areas. Another source of trade deficit is caused by European and American’s direct investment in mainland China to produce goods sold in the US market. Even though mainland China has trade surplus on paper, the actual profit from the trade goes directly to these companies based in USA and Europe. So there is a danger to actually hurt US economy if the US government creates trade barriers to curtail trade with China.

If you look at the trade statistics between USA and China over the years, you will see that both import and export are growing at rapid pace. The trade imbalance is obvious: the import/export with China is 65,238 / 321,507 million in 2007 while 55,185 / 287,774 million in 2006. So, why the huge imbalance. Back in 1985, the import/export with China was 3,855 / 3,861million. The import and export figures were pretty close. The import from China has exploded over the past 20 years while the export to China has grown at a rapid pace but just cannot catch up with the growth of import. So whose fault is it? One must answer this complex question from many different angles. I don’t pretend that I know all the answers but I will list a few that I think are reasonable.

1. The China’s domestic market is small compared to the US market. It is always easier to sell goods and services to the bigger market. As China’s economy grows, the consumption power of the Chinese grows as well, which means that more US products can be exported to the Chinese market. So I am optimistic that the trade imbalance between USA and China will improve over the years. The trade deficit will not accelerate indefinitely. I am not saying that the deficit will stop growing. It will simply slow down to a point that it might actually shrink.

2. As the US dollar continues its current pace of depreciation, the US made products will become more competitive and of course more exports are likely to the Chinese market and to the rest of world as well. There is a huge debate as to whether China has manipulated its currency to artificially depress the exchange rate of Yuan against the dollar. One must realize that it is actually very difficult to fix exchange rate for a country like China because the scale of the international trade. In order to artificially fix exchange rate, the Chinese currency authority has to absorb all the extra dollars that people want to sell and give them the Chinese Yuan instead. This creates a inflationary pressure to the Chinese economy as more Yuan is printed to meet the demand while the Chinese authority is holding huge amount of dollar-based assets with very low yield. So eventually this has to stop. China has to let the Yuan to appreciate against dollar and this is happening. As of today, one US dollar can buy less than 7 Yuan. It appears that the US dollar is depreciating against the world currencies, especially the Euros. So the exchange rate changes between Yuan and dollar is not a special case but part of a general trend. Unlikely the trade deficit between China and US is the main reason.

3. Though China’s market is relatively small, it has huge appetite for capital goods such as equipments for manufacturing machineries and electronics. China buys equipments to increase her capacity in the manufacturing, agriculture, and high tech sectors. However, the USA and the rest of the developed world impose trade embargo against China to stop shipment of any products that are deemed sensitive to military use. One can say that military use of equipment is highly specialized so that this won’t impact exports to China a great deal. This is not true. In fact, many equipments have dual purposes. Also, majority of equipments contain technical aspects that can be interpreted as military grade. The very government agencies that regulate trade sanctions against China do not have all the tools and knowledge to determine what can and cannot be sold to China. As a result, companies and traders are reluctant to sell products to China if there is perceived danger that such trade might be interfered with by the US authorities. Such is very foolish of the US government but the government has done many foolish things in the past. This one is no exception. So it is the US government that is hurting the US businesses in expanding their market and creating jobs. The US government can’t tell the public that trade deficit is caused by its misguided policies. So it invented numerous excuses to either explain away the deficit by blaming it on exchange rate or incites fear among the public to Chinese products by exaggerating product defects to install non-tariff trade barriers. Of course the latter approach would eventually backfire because unhealthy fear among the public can only distort the consumption pattern and also trade barriers can trigger trade retaliation. Trade has two sides. If USA takes aggressive actions to harm import, its export suffers as well.

4. Made in USA doesn’t imply good quality. Many Americans want to believe that US made products are good while made in China is bad. This is not true in general while definitely not true when comparing US made products with the ones made in Japan or made in Germany. In fact, for a period of time, US made products are expensive and have bad quality. Fortunately, USA being the most innovative country can always generate newer products and services to grow the economy. But very quickly, the new ideas and innovations become matured products that are made in low cost areas overseas. This is not the fault of the free trade. This simply means that the US workers are not productive enough to make the goods with high quality, low costs so that they are competitive.

So next time when you want to boycott Chinese products, please think (1) whether the products are actually sold by a US company which might employ your friends or relatives (2) when you are doing this, could the Chinese boycott the stuff you make as well (3) if you don’t buy this, will you buy the more expensive and crappy US made products.

Yeah, you can always buy the same products from Vietnam, India, or other south east Asian countries too. But it is very likely that they are made by factories owned by ethnic Chinese too. I am saying this to those closet racists out there.

Finally, if you want to trade with Japan and Germany which are two countries that US still occupies, that is fine too. Just remember these two countries actually make their products in lower costs countries like China and Mexico. Of course, the racists don’t like Mexicans very much either.

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10 Comments

Filed under America, China

10 responses to “Trade between USA and China

  1. RightsIsForSlave

    It is always easier to blame on the scapegoat for its own misfortune simply because of the economics. Blame china for the losers in US-China trading is one such example. It has multiple benefits at low cost: (1) gain market recession from china without paying a dime; (2) pacify and ease internal stress at less adversary effect; (3) pave the way to justify violations of existing trade agreements for more leverages. Unfortunately, as pointed in the essay, blaming china is also a double edge sword simply because the biggest monetary beneficiaries of US-China trade are the capitalists in US. It is therefore, more likely, the loud foul-calling is just a preemptive defensive gesture to fend off the expected angers from those losers of US-China trade.

    As for china, the most important issue, more important than capital gains, is the development of domestic market that can sustain the relentless employments pressure resulting from the unprecedented urbanization in human history.

  2. suqing17

    hmm, I like this piece. Unfortunate, Americans who will read it most likely don’t need the education, while those who need the education won’t read it–Lou Dobbs fills them all.

  3. I am one of the co-authors of “How to stop China
    from stealing our jobs” which was just published today: http://www.worldnetdaily.com/index.php?fa=PAGE.view&pageId=62298, and I’d like to explain why I disagree with your posting:

    1. You wrote that jobs in the exporting industries make up for the jobs lost in import-competing industries. But this would be true only if trade were in balance. If we were insisting that our trade with China be in balance, they would be dismantling their barriers to American-made products and companies like Harley-Davidson would be expanding US production not laying off workers.

    2. You gave various excuses for the reason why our trade deficit with China was out of balanced, but ignored the real reason: that the Chinese government have been pursuing a policy designed to export, but not import from the United States. We used their 30% tariff on Harley-Davidson motorcycles as our example, but there is the small matter of the more than $1 trillion of dollars that they have accumulated as part of their currency manipulations.

    3. You claimed that the Chinese market is small and that is why we have a trade deficit. Their motorcycle market is not small and it is growing at a 15% clip. Harley-Davidson sales would be growing rapidly there if they were not for the Chinese-government imposed trade barriers.

    The fact is that our trade with China is not free trade. It is purposely kept unbalanced by the Chinese government. We recommend Import Certificates as the best way to bring our trade into balance.

    Howard Richman
    http://www.trade-wars.blogspot.com

    • Alex

      China did and does not steal any job from you. Why do not you think about if you work hard as Chinese people? When I was in Italy, I was thinking China steals a lot from us. When I came Here, I found Chinese people just try their best to work hard. If we can work harder, why we need to argue with this problem?

  4. suqing17

    I am no expert on this topic, I simply speak with my common sense.
    I kind of feel absurd when Mr. Richman blames the Harley workers’ unemployment on China. If the market for Harley SHRINKS and people lose their jobs because Chinese products take up that market, you can blame China (let’s even put the discussion about the result of ‘free trade’ aside). But are those people originally buying Harley are now buying Chinese motorcycle? No. The fact is, consumers (Chinese, to be precise) who Harley HOPE to buy their bikes are buying Chinese bikes. Harley loses the competition in the fight for NEW territory. Then blame China for what? Not tossing Harley a piece of the cake?
    Well, you may argue the Chinese manufacturers didn’t win the competition fairly because the government set policies in favor of them. Then which government doesn’t do that?–The latest news I found today, US government is imposing the 185.3% tariff on magnetic refrigerator stickers produced in China, in addition to the 70.41% tariff already imposed. Who is unfair, and who is blocking the ‘free trade’?
    PS. A phrase I just learned today, ‘non-tariff trade barriers’. Brainwashing Americans in mass media from almost every angle with information like ‘made in China’ are all junks, Chinese products are poisonous, or calling for the boycott of Chinese products–who is unfair, who is blocking the ‘free trade’, WITH DIRTY TRICKS?

  5. mitwildthing

    To Howard Richman:

    I want to address your concern that trade imbalance between US and China is caused by currency manipulation and trade barriers.

    1. China is not “stealing” jobs from US, at least not the good paying jobs. The reason is simple. These jobs are gone permanently no matter US trades with China or not. Even if China doesn’t export to US, other countries from southeast Asia, Latin America, Eastern Europe will do the same. In fact, US corporations shifted production to China to make bigger profit and stay competitive. The gain of such move is returned to the US in terms of taxes, investments, and higher paying positions in research and development.

    It is not true that just because the import to US is much larger than export, the jobs created due to trade is less than the jobs shifted overseas. The reason is also simple. Many jobs are created by the imports: (1) US direct investment in China creates jobs in management, research and development. (2) US importers created jobs in wholesale and retail because cheaper goods imply more sales (3) The saving from cheaper imports gives US consumer more purchasing power on other products that has stimulated economy.

    2. Trade imbalance between China and US is not caused by exchange rate and trade barriers. At least they are not the main reasons.

    I had explained that why artificially depressed exchange rate can cause big problems and it won’t sustain in the long run so that Chinese Yuan and other major currencies are appreciating against the dollar. Still, such change in exchange rate has not created a big dent on the trade deficit of US so far. The US products are not competitive not just because of price but because of quality. As a trivial example, consider the consumer electronics made in Japan such as Cameras and Camcorders. They are much more expensive than similar products from other countries and yet they dominate the market due to the perceived quality. Innovation also helps. Products like IPod and IPhone dominate the market despite lower priced products made by other countries. The US economy grows by innovation and quality, not by low costs.

    I can’t verify the tariff rate on motorcycles sold by Harley-Davidson to China so that I will take your claim at face value. However, since China is a member of WTO for a few years already, the tariff rates in China should have been or will be lowered to the common rates accepted by WTO rules.

    I speculate that the reason that Harley-Davidson doesn’t enjoy sales growth in China is because the products of Harley-Davidson are considered high-end. Many of the motorcycles that people ride in China are called scooters here in US. For one, Chinese who ride motorcycles are using them as tools of transportation not cruising. So low-cost is crucial. For two, more Chinese are moving to cars for transportation and motorcycles (scooters) are falling out of favor since the early 1990s. For three, the market segment that can afford to buy luxury motorcycles has not matured. Few people have the extra money to spend on motorcycles after they have spent all their savings on cars.

    The Chinese policy to prohibit motorcycles on certain roads, certain cities, at certain times are aiming at all motorcycles (scooters), not specific to Harley-Davidson. The goal is to control traffic and avoid chaos caused by unruly motorcyclists. The traffic condition in China is not comparable to the most of US because of the mixture of pedestrians, bicycles, and motor vehicles.

    3. I wish Harley-Davidson every success in China for my selfish reason that I live in Milwaukee. I just hope that Harley-Davidson can create some low-end products that meet the demand in China. I imagine the successful products would not be something that is noisy or powerful. Rather, the products should be quiet and gas efficient. I can’t even think of such a thing with Harley-Davidson label on it with a straight face. Maybe they should create a different brand.

  6. Pug

    Mr Richman,

    It is not just Harley-Davidson, but they slap tariffs on imported cars from Toyota, Honda, etc… so that they can encourage people to buy cars made in China. As most people in China pay 50%, or more for a Japanese car rather than a Chinese car.

    Why don’t we put in some kind of Tariffs? We are brainwashed that free trade is good, but it kills good jobs here in the states. American Companies got the better end of the deal when they demand China to make their products as cheap as possible while cutting corners. This means that there’s alot of water and air pollution as a result of this.

  7. realbrandon

    I think most of us are missing one fact, Harley-Davidson is strictly an American symbol, and not universally adored elsewhere around the world. It does well in US because Americans identify with it. I am afraid it doesn’t enjoy the same recognition outside of US mostly. Heck, plenty of younger Americans don’t want to be associated with Harley neither.

    So I would be surprised if it ever sells well in China.

  8. bob

    This is bull, China’s trade impacts the poor factory workers.

  9. Francis

    It was mentioned a couple of times that manufacturing in China is more efficient and that US workers are not productive enough to compete. For my benefit, would someone please explain why this is the case?

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