Junyuan KeProfessor Paul RubinEcon 190 Final Paper 3rd draft12 April 2015

International Trade between China and the US

At the opening of the sixth round of the China-U.S. Strategic and Economic

Dialogue, Chinese President Xi Jinping addressed his vision of the relationship between

China and the United States (ChinaFile, 2014):

“In the past 35 years since the establishment of diplomatic, relations

between China and the United States on the whole have moved forward

and made historic progress although there have been ups and downs…

China-U.S. cooperation not only benefits our two people, but also promotes

peace, stability, and prosperity in the Asia-Pacific region and the world as a

whole”(Xi, 2014).

Since the 1970s, the progress in diplomatic relations between the United States and China

not only maintained regional stability, but also stimulated a rapid growth in bilateral

trade. Compared to the total trade of less than five million U.S. dollars in 1970, the

imports and exports of the United States trade in goods with China in 2014 amounted

respectively to about 470 billion and 120 billion U.S. dollars (United States Census

Bureau, 2014). More importantly, these numbers appeared to be accelerating at an

incredible rate. Some might argue that the U.S. and China have consistently been

mutually benefiting each other through communication and cooperation. Yet the path of

building a stable and beneficial bilateral relationship between China and the U.S. was full

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of twists and turns. Even today, international trade between the two countries is often

obstructed by regulations and misunderstandings.

As the world’s first and second-largest economies, the U.S. and China will

inevitably determine the future shape of the world economy. Consequently, even the

smallest policies regarding economic issues between the two countries could have a

considerable impact in shifting future economic patterns. China and the United States

have had a colossal economic influence on each other; this burgeoning influence not only

magnifies the significance of the bilateral relationship, but also affects the rest of the

world. However, economic growth can only be stimulated if both the U.S. and Chinese

governments have fewer restrictions and the people of those countries have a better

understanding of bilateral trade. In addition, these connections should not be restricted to

trade-friendly governmental policies, but should also include the understanding of normal

people. The most essential part of building a sustainable bilateral trading accord that is

also efficient involves obtaining greater awareness of international trade issues among the

public.

The History of Bilateral Trade

China’s Vice Minister of Commerce Zhong Shan begins his article U.S.-China

Trade Is Win-Win Game with a simple but straightforward statement: “A sound and

stable China-U.S. economic and trade relationship is more important than ever”(Zhong,

2010). According to the U.S. Census Bureau, China exports the most goods to the U.S.

out of all foreign countries, accounting for more than 15% of U.S. total trades. On the

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other hand, China is also the U.S.’s third biggest export destination; the total trade

between China and the U.S. reached 93 billion dollars in 2014. Looking at these huge

numbers, it is hard to believe that trade between the U.S. and China after World War II

started at zero.

Trade between the U.S. and China began with a defrosted relationship in the early

1970s, when the two countries first began diplomatic communications. In the 1950s,

trading was basically impossible between the two countries since the U.S. had been at

war with China on the battlefields of Korea and Vietnam. However, a sense of

transformation emerged when President Johnson made the determination to end the

Vietnam War in 1968. The book International Relations since 1945 stated that the

decision of President Johnson “gave China an impression that the U.S. had no interest in

expanding in Asia anymore while the USSR became a more serious [problem]”

(Dunbabin, 1994). Before President Richard Nixon declared his first trip to China in

1971, almost all countries in the rest of the world alienated the economy of China. In

U.S.-China Trade, 1971-2012: Insights into the U.S.- China Relationship, the author

stated that China’s economic marginalization was “not to last”(Wang, 2013). The famous

“Ping-Pong diplomacy” started in 1971, when the U.S. State Department started to allow

U.S. citizens to visit China. The opening of the U.S. and China relationship went beyond

political forums and extended to the domain of economics as President Nixon brought the

U.S. trade embargo on China to an end. With decreasing limitation for trade, business in

the U.S. started to explore the newly opened market of China. By the time, companies in

the U.S. were able to “export certain non-strategic goods directly to China and haul

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Chinese cargo between non-Chinese ports”(Wang, 2013). During the decade between

1970 and 1980, both China and the U.S. doubled their trade with each other every year,

and by the end of the 1970s, the United States’ trade balance with China rose to about 2

billion dollars. However, restrictions on trading with China were still strict, resulting in a

number that is lower than 1 percent of the total world trade of the U.S. (Wang).

The renewal of bilateral trade started in the beginning of the 1980s and continued

into late twentieth century. Thanks to the establishment of embassies by the U.S. and

China in 1979, several major controversies were solved and the foundation of trade

became more stable than before. Trade was described as “mutually beneficial”(Wang)

and the U.S. had become China’s third-largest trading partner by 1984(United States

Census Bureau). Meanwhile, China gradually transformed its relatively closed economy

and started to open the doors to the rest of the world. Multiple coastal cities were selected

and combined together as special trade zones; rebuilding the economy had gradually

taken place. In addition, what is worth mentioning is that China started exporting back to

the U.S. during the 1980s. The London School of Economics and Political Science

reported China’s contemporary foreign trade rose “steadily, albeit unevenly, under an

import substitution strategy aimed at promoting local production of industrialized

products” (Li, 2012). One of the most important intermediate roles between the U.S. and

China during the 1980s was Hong Kong (who was under the control of the United

Kingdom at the time). Hong Kong became the door for China to get out and

communicate with the outside world. During the 1980s, more than sixty percent of

China’s exports to the U.S. were “initially consigned to buyers in Hong Kong who resold

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them to a third party, who then shipped them to the United States, and a further 10

percent of Chinese exports to the U.S. were re-exported via a third country” (Wang).

Being compared to trade in the 1970s, economical communication during the decade of

1980 to 1990 represented stable growth and reformation.

The third period in the U.S.- China trade relationship happened in the beginning

of the twenty-first century, as the World Trade Organization “successfully concluded

negotiations on China’s terms of membership of the WTO”(wto.org). In the book China

and the WTO: Accession, Policy, Reform, and Poverty Reduction Strategies, the authors

describe China’s entry to the WTO as a “decisive deepening of the process of integration

with the world and a move to a much stronger emphasis on rules-based reform”

(Bhattasali xi). After 15 years of negotiation, the acceptance of China in global trade on

11 December 2011 brought a “new order” to the world economy (Li, 2012). Behind

China’s access to the WTO, the U.S. was the supporting force and the main mover.

Joining the WTO opened the gigantic local Chinese market. Compared to the total China-

U.S. trade of 102,278 billion dollars at the end of the year 2001, this number doubled in 3

years reached 196,682 billion dollars in the year 2004 (United States Census Bureau).

Fortunately, trade between the U.S. and China exceeded the platform of the WTO. In the

2000s, China gradually realized its advantage in massive and cheap labor and became the

largest part of the world’s manufacturing line.

Governmental Regulations against trade

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Since the beginning of human history, trade has constantly brought nations wealth

and benefits. Adam Smith, who later was cited as the father of modern economics,

pointed out his idea about trade in his famous work The Wealth of Nation in 1776. Smith

drew an analogy between families and nations that “it is the maxim of every prudent

master of a family, never to attempt to make at home what it will cost him more to make

than to buy… if a foreign country can supply us with a commodity cheaper than we

ourselves can make it, better buy it of them…”(Smith). Due to the difference in

countries’ natural resources and technological level, countries have comparative

advantages that allow both sides to benefit from international trades. Because

comparative advantages exist in every country, nations are able to specialize in certain

fields or certain products and sell them in the international market for a lower and more

competitive price. Consumers on the other hand, benefit from international trade because

the products they buy from the international market are cheaper than locally produced

goods. Therefore, consumers enjoy a higher standard of living thanks to the lowered price

level resulting from international specialization.

However, skepticism about international trade never stopped. Even though

countries have generally welcomed trade, the restrictions of free trade have never

vanished. When economist Murray N. Rothbard is describing the term “Free Market”, he

states that

“In modern game-theory jargon, trade is a win-win situation, a ‘positive-

sum’ rather than a ‘zero-sum’ or ‘negative-sum’ game…however,

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exchanges are not necessarily free. Government, in every society, is the

only lawful system of coercion”(Rothbard).

Despite the fact that economists have already shown people how trade benefits everyone

due to the difference in comparative advantage, free trade barely exists in any country in

the real world. Instead, some promote limiting trade in one way or another. Economics

Professor Alan S. Blinder compared free trade to people’s daily laundry issues that:

Instead of washing our own clothes, a lot of people have their clothes

“laundered at professional cleaners. Anyone who advised us to ‘protect’

ourselves from the ‘unfair competition’ of low-paid laundry workers by

doing our own wash would be thought looney. Common sense tells us to

make use of companies that specialize in such work; paying them with

money we earn doing something we do better. We understand intuitively

that cutting ourselves off from specialists can only lower our standard of

living”(Blinder).

In the case of the U.S. and China, the governments seemed to adopt protectionism

as one of the fundamental policies against trade. According to Wall Street Words,

Protectionism is “the theory of fostering or developing domestic industries by protecting

them from foreign competitions trough duties or quotas imposed on importations”(Wall

Street Words). Protectionism is generally classified into four factors: job preservation,

national security, infant industry protection, and unfair competition. Specifically in

China, the government protects its state-owned enterprises through subsidizing national

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companies to create unfair competition in the international market. The U.S. on the other

hand, set a high tariff on imports in order to protect native industries.

The Solar Panel Dispute. One example that reveals regulations against trade

from both countries is the trade war of the U.S. and China regarding China’s import of

solar panels. The New York Times reported an article named China Criticizes Steep U.S.

Tariffs on Solar Panels that reveals the dispute of the two countries on protecting the

trade of solar panels. The article describes the so-called “trade war” between the U.S. and

China in the field of solar energy. Always regarded as the upcoming alternative power of

human beings by environmentalists, solar power wasn’t proficient for years due to the

high fixed cost of solar panels. However, recently there is a boost in the industry of solar

energy due to the emergence of cheap solar panels. Even regular Americans started to

consume household solar panels and set them on their own roofs. In states with a lot of

sunny days, solar panels have become a routine for American families for it is always

more economic and environmentally friendly than the regular electricity supply. Behind

the decreased price of solar panels, are several Chinese enterprises providing relatively

inexpensive solar panels. The Chinese government has heavily subsidized the export of

solar manufacturing industries, making exporting solar panels more price-competitive. As

a result, the entire international market of solar panels has grown because the supply

increases due to the decrease in cost. Solar panels soon became an inexpensive substitute

for conventional electricity. Nonetheless, the United States Department of Commerce

announced a new tariff in December 2014. The tariffs include

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“Antidumping duties of 26.71 percent to 78.42 percent on imports of most

solar panels made in China, and rates of 11.45 percent to 27.55 percent on

imports of solar cells. In addition, the department declared anti-subsidy

duties of 27.64 percent to 49.79 percent for Chinese modules”(The New

York Times).

Some might contend that this was an effective act in the “trade war” against China.

However, the truth is that the “trade war” never existed from the beginning. In

international trade, dominance of a market does not necessarily imply a bad thing.

Instead, the phenomenon of one country dominating the market by expertise with

comparative advantage reveals the efficiency of free market trade.

Subsidies From The Chinese Government. Despite benefiting national

enterprises, the subsidies that the Chinese government gave to solar energy companies

actually benefit consumers as a whole. In fact, consumers in China are the ones who were

harmed in this subsidizing act. Without subsidy, production of solar panels for consumers

in Mainland China ironically became even higher than the export price. In contrast to

Chinese consumers who had to pay a higher price, general U.S. consumers benefited

from the low cost. In addition, U.S. companies that provide solar panel installation

services also increased the scale of their services. According to the National Solar Jobs

Census, jobs in the U.S. solar industry have been increasing 20 percent every year.

China’s act of subsidizing seemed to be beneficial at first glance since it did stimulate the

growth of local industries. However, the money for subsidies came from general

consumers who paid an even higher price after the subsidy.

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Tariff From The U.S. On the other hand, the U.S.’s decision to restrict solar

panels from China might be the product of political pressures from the domestic solar

panel production industry. The tariff that the U.S. government placed on imported solar

panels not only decreased total consumer surplus, but also made the market less efficient.

Domestic solar panel factories might be in a position to survive in the short run, but

American consumers had to pay more for solar panels of the same, if not higher quality.

In this situation, both China and the U.S. went against the principle of free trade.

Subsequently, the cost of Protectionism is not only that consumers in both countries have

to pay more money on solar panels, but companies benefit less and fewer jobs are created

on the supply side of the market. Instead of regarding the solar panel situation as a trade

war, the U.S. and China should realize that it is instead a potential win-win situation. In

Murray N. Rothbard’s words, “taxation is a coerced exchange, and the heavier the burden

of taxation on production, the more likely it is that economic growth will falter and

decline. Other forms of government coercion like price controls or restrictions that

prevent new competitors from entering the marker hamper and cripple market

exchanges…”(Rothbard). The local market would be way more efficient if the U.S.

imposed less or even no tariffs on imported goods.

By carrying out protectionism, both the U.S. and China lose in the competition. In

his work, author Michael Connolly sees “ Government procurement practices” as one of

the mechanisms of protectionism that “may give partial or complete preference to

nationally produced goods over imports…” He also states “The policy has an obvious

protective effect on domestic production since it allows domestic producers to charge

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more than world prices”(7). In many cases, political pressures coming from specific

interest groups might be able to harm the public wealth. If both governments in the U.S.

and China believe more in free trade than in protectionism, social welfare would be larger

in both countries.

Misconceptions about free trade

Aside from the influence of governmental regulations on the free market,

misunderstandings of the public on characteristics of international trade can also lead to

negative effects that result in inefficiency of the market. Regarding the trade between

China and the U.S, total surplus of the society as a whole is often compromised in order

to compensate the loss of specific interest groups.

Hostilities Toward Imports. One common misconception people in the U.S.

have regarding the trade between the U.S. and China was the hostilities in regards to

“Made in China” products. One example that seemed to be unacceptable by people in the

United States happened during the 30th Olympic games in London, 2012. American brand

Ralph Lauren designed the uniforms for team USA during the opening ceremony in

London. When talking about the suits of team USA, reporter Taylor Bigler describes:

“The men’s uniforms feature a blue blazer with Lauren’s large signature

pony emblazoned on the chest, a white shirt, a red, white and blue tie and

white slacks. The women’s version is similar, but features a silk blouse

and white skirt rather than pants”(The Daily Caller).

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However, these typical American styled uniforms were later criticized by public media

because they were produced in China. According to ABC News, Senate Majority Leader

Harry Reid blamed the Olympic Committee that “they should be ashamed of themselves,

and they should put the uniforms in a big pile and burn them and start all over again”.

People’s dissatisfaction towards the manufacturer of Team USA’s Olympic uniform is

understandable because Team USA was representing the country competing on a global

arena. However, author Peggy Noonan stated in her article A Remedial Communication

Class that, “in the controversy surrounding the uniforms of the 2012 U.S. Olympic team,

the problem isn’t China”(The Wall Street Journal). Noonan further pointed out that the

uniforms were “merely a deep embarrassment and a missed opportunity”. An article

called “The Imports of Patriots” that was published on the Wall Street Journal concluded

that the horror was not the opening Olympic ceremonies in London, but the “horrified

reaction from American politicians that those uniforms are made in China.” They go on

to say, “Someone should tell these folks that if you want to have exports, you also need

imports”(WSJ).

Despite the embarrassing feelings, people should start to realize that Team USA is

also a privately funded team. The Olympic Team simply contracted Chinese

manufacturing companies because they provided same quality clothing at a lower cost.

The Wall Street Journal asked the resentful public a good question:

“Olympic uniforms are an easy patriotic riff, but no doubt they were

contracted to be made in China to save money. Where would you rather

have the U.S. Olympic Committee spend its marginal dollars, on training

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for the athletes to win more medals, or on high-priced berets? What’s the

more patriotic decision?”

As a global company, it is not only natural but also necessary for Ralph Lauren to

minimize their production cost by using cheaper foreign factories. Since the U.S. has its

comparative advantage in designing and technology, and on the other hand, China clearly

provides cheaper cost of products. In fact, some economists in the U.S. actually

celebrated the fact that China made the U.S. Olympic Uniforms. Wall Street Journal

author John Bussey argued that election seasons have always made the public more

sensitive toward political issues, and more importantly, “Populism gets votes”(Bussey).

Bussey then pointed out that by using Chinese manufacturing line, Ralph Lauren earns

more than fifty percent of the net profit. In fact, manufacturers in the U.S. often depend

on imports of natural resources and intermediate products in order to lower their cost of

production. They need lower cost raw materials to become more competitive. The truth

is, a great portion of imported products by the U.S. is used in the production of other

goods. A great amount of U.S. imports are intermediate goods for U.S. domestic

producers. Meanwhile, the import of lower cost goods tremendously increased the

standard of living of American families.

With a more competitive market insured by international trade, a wider range of

selection is provided to American families. “Across the business community there’s a

recognition that we need to talk about trade in a more sophisticated way, that global value

chains can’t be boiled down to three words: ‘Made in China’ or ‘Made in America’,

”John Murphy of the U.S. Chamber of Commerce concludes. Although things might

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seem awkward in issues like the Olympic games where people had national pride, it is

necessary to realize how the economy works behind the dilemma.

Job Lost Due To Trade. Another typical misunderstanding of people in the U.S.

is the opinion that jobs are lost because of imports. According to the argument of the

Economic Policy Institute, a left-leaning economic think tank in Washington, D.C., the

U.S. lost 2.7 million jobs due to the U.S.-China trade deficit in the decade between 2001

and 2011 (Scott). It argues that the wages of American workers “have also suffered due

to the competition with cheap Chinese labor. A typical two-earner household loses

around $2,500 per year from this dynamic”. Robert Scott, the author of this report and the

director of trade and manufacturing policy research at Economic Policy Institute believed

that China has been trying to govern their economy “on the back” of the U.S. for longer

than ten years. In fact, there is a wide spread belief currently in the U.S. that due to its

trade deficit with China, the U.S. has lost millions of jobs in the past ten years.

When unemployed people wanted somebody to blame, they turned their target to

the big picture, either political parties or local leaders. In the U.S.’s case, people started to

blame China and free trade. A perfect example of this would be an article published on

Crain’s Chicago Business named ‘Made in China cost Illinois 132,500 jobs’. The reporter

of this article, Ally Marotti, states that as big states like California and Texas suffered

from huge job displacement in high-tech manufacturing jobs, Illinois’s job loss was

connected to major manufacturing industries. “China’s entry into the World Trade

Organization in 2001 has had a negative impact on U.S. workers and the economy as a

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whole, ” the article argued, “with the job loss and U.S. goods trade deficit increasing

exponentially” (Marotti). People argued that the huge trade deficit between China and the

U.S. has taken major big companies out of the U.S. and therefore jobs are displaced

leading to unemployment in manufacturing industries. Some even labeled this

phenomenon as part of “the Wal-Mart Effect”(Scott, 2007). The reason is that almost 10

percent of U.S.’s annual imports from China are generated by Wal-Mart (Scott). As the

largest retailer in the U.S., Wal-Mart’s daily consumption goods have lower prices than

domestically produced goods. Therefore, local businesses that used to compete with Wal-

Mart, such as local toy, furniture and apparel manufacturing companies, lost their

contracts for having a higher cost of production and thus being less competitive.

It is easy to see why importing from China has gained so much attention. Since a

large portion of U.S. industries, especially manufacturing industries are hugely

influenced by unions, workers who lost their jobs are more likely to acquire political

attention and infect political decisions by lobbying against international trade. However,

the entire theory the Economic Policy Institute proposed was based on their idea that

“Exports support jobs in the United States, and imports displace them” (Scott, 2007). On

the contrary, instead of harming the job market in the U.S., imports actually boost jobs

and employment. On one hand, the argument about imports harming employment is

generally not true. One reason is that more than half the firms that import directly are

small businesses, employing fewer than 50 workers according to the U.S. Chamber of

Commerce. Huge and stable businesses in the U.S. are generally unlikely to be influenced

by imported goods. Another reason is that jobs lost from imports are not permanent. Job

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losses due to imports are generally short-term unemployment. Because of the shift in

economical focus, workers will lose their jobs in the short run. However, this increase in

unemployment is not permanent. In the U.S.’s case, a short-term job lost is rather

reasonable because the country is shifting more towards technology industries- where the

U.S. has more comparative advantage. In the long run, workers who lost their jobs will

move from manufacturing industries to other industries and hence become more

productive. On the other hand, “import generates export”, says the U.S. Chamber of

Commerce. Due to the U.S.’s position as one of the most essential parts of the world

supply chain, imported products include parts of U.S. exports. Critics who attack imports

from China fail to realize the benefits of imports in elevating Americans’ standards of

living. They also neglect the fact that imports shift U.S.’s job more competitively.

Banning Child Labor. The third type of misunderstanding came from the

hostilities to Chinese producers because people believe the products are made by the

hands of unfairly treated laborers, especially child laborers. According to the New York

Times, children in China aged from 13 to 15 were often “tricked or kidnapped by

employment agencies in an impoverished part of western China and then sent to factories

where they were forced to work more than 300 hours a month”(Barboza, 2008). The

report stated that these exploitations reflected the shortage of laborers under high

inflation and factories hired illegal workers to “stay competitive”(Barboza). People with

moral concerns believed that imports from companies that produced products with unfair

labor should be banned due to moral purposes. People believed that prohibiting exploited

labor will not only lead people to buy more fair goods, but the ban itself will also

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promote the access of education about child labor. The belief is that if products of

companies that used unfair labor were banned, there would be no incentives for those

companies to exploit laborers. In addition, children will be able to go to schools if they

could not get a job; as a result, they will later become more productive due to higher

education.

However, MIT economics professor Paul Krugman simply rejects this idea by

stating, “Bad jobs at bad wages are better than no jobs”(Krugman, 1997). Krugman

believed that poverty and exploitation that benefit international companies have a long

history. In fact, global poverty is a much more intensive and complicated problem that

banning the products produced from third world countries will only make the problem

even worse. One reason behind the existence of child labor is the absence of

opportunities in impoverished areas. Immoral as it sounds, many families in countries

like China actually count on the work of their children. Without child labor, the incomes

of the already poor families will be cut even lower. Education on the other hand, is way

too expensive for a family that needs its children to work. Thus, it is even harder for

children to obtain education when their families receive less income. Even worse than not

having any jobs at all, people might turn to more dangerous jobs including prostitution in

order to support their families. Imposing a ban on trade will not be effective because

poverty is the real source of the problem and it can only be solved by long-term economic

growth.

On the contrary, author Colin R.Fraser sees low wages not as the scourge of

developing counties, but as “a bargaining chip that can be leveraged into a way out of the

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‘developing world’”(Fraser, 2010). Because poverty is something too hard to change,

unfair labor is actually a way economies in third world countries need to go through in

order to achieve economic growth. After all, bad opportunities are better than no

opportunities at all. The fact that factories in third world countries hiring unfair workers

is “inevitable”(Krugman) because of the limitations in opportunities due to local

economical conditions. Yet the upside is that improvement of living standard of people

will always get better when there is an expansion in regional export industries. The

reason according to Krugman is that growth of manufacturing has a “ripple effect

throughout the economy. Although it sounds cruel, but child labor is the only way for

developing countries to get rid of child labor.

Future of trade between the U.S. and China

China’s Aging Population. One major problem China is going to face in the

recent future is its declining working population. As a side effect of the one-child policy

introduced to China since 1978, aging population became the major problem a few

decades later. The Guardian reporter Tania Branigan used the word “time bomb” to

describe China’s age distribution (Branigan, 2012). According to her article, there were

“six workers for every over-60” in the beginning of the 21century, but in 2030, “there

will be barely two”(Branigan). For major industries in China that rely highly on

manufacturing, the shortage of young workers could be a fatal harm in the future. In

addition, The Economist article The Most Surprising Demographic Crisis pointed out that

“one-child policy has probably exacerbated its dire gender imbalance.” The article stated

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that in 2010, “there were more than 118 boys for 100 girls”. Seeing the disproportion in

China’s population, Forbes contributor Gordon Chang asked the question “Is China

running out of workers?”(Chang, 2013). Chang believed that although one-child policy

did slow down China’s population growth, the “shrinking workforce”(Chang) would

intensely impede economy growth.

As TIME reporter Bill Powell puts it, China is going to its “end of cheap labor”.

Stimulated by its upcoming reduction in working labor, China is forced to go through a

transformation. The existing growth model, as economist Mitali Das explains, “relies

heavily on increasing the number of workers involved in production (factor input

accumulation) and cannot be sustained”. Consequently, China will have to find a way out

by changing into another growth model and shifting the balance of the economy. The

price of future labors in China will not be as profitable as it is now any more due to

population problem. As a result, more international companies are gradually moving their

production line from China to countries like Cambodia, Laos and Vietnam.

The U.S.’s Trade Deficit. On the other hand, The most concerning issue in the

U.S. is its huge trade deficit with China. According to the U.S. Census Bureau, the

balance of U.S. trade in good with China in 2014 was -343 trillion dollars. People in the

U.S. worried about the trade deficit with China, some even argue that people are

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“Trading away their future”(Scott). But the reason a trade deficit with China exists is

because a lower standard of living in China allows workers with lower wages. Since

China is shifting its exporting industries, the trade deficit with China is nothing to worry

about. As Forbes staff Russell Flanner puts, a way to alleviate U.S.-China’s trade gap

without “turning to protectionism” is to increase exports to China (Flanner).

Source: Forbes

Meanwhile, China’s huge trade surplus with the U.S. is also the main reason why

China kept buying U.S. treasuries. More importantly, China buying U.S. bond is

generally benefiting the U.S. Due to the enormous export to the U.S., there is a huge

supply of dollars in China because the U.S. is paying Chinese exporting companies with

U.S. dollars. Since China is willing to keep its currency Yuan relatively weak so that they

gain more profit from export, it prints more Yuan in order to maintain the trade

imbalance with the U.S. As a result, Bank of China started massively buying the U.S.

Treasury bond in order to obtain some profit from “the gigantic pile of dollar bill” it has

to maintain, argues Forbes author Ian Shepherdson. The act of buying T-bonds only

provides Bank of China with risk-free interests, its also helping the U.S. government’s

debt. Moreover, the demand for U.S. T-bond went up after China’s massive purchase,

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resulting in a higher price of U.S. Treasury bonds. Consequently, the U.S. government

will have to pay lower interests for their bonds.

Conclusion

The U.S. and China have gone through a complicated trading relationship. From

the early 1970s when the two countries first established diplomatic relationship to

China’s entry to the WTO in 2011, trade between the two countries has been growing at

an increasing rate. However, governmental regulations and opinions of specific interest

groups often ignore the benefits of trade and thus undermine the U.S. and China’s mutual

gain. According to Dong Wang, “deindustrialization in the U.S. and industrialization and

urbanization in China” have already occurred. Unrestricted trade is even more important

under this circumstance. As Tay Yoshitani states in his article on Forbes, the future of

China and the U.S. doesn’t have to be “a zero-sum rivalry” or “a 21st-century version of

the Cold War”(Yoshitani). In fact, the two countries bonding with each other will have a

larger profit for people in the U.S. and China. Judging from China’s gradual shift of

manufacturing industries and the U.S.’s determination to get out of recession, the two

countries will be closely connected in a mutually beneficial way. If governments and

people in both countries set fewer restrictions for free trade and promote trade in general,

the two countries will enhance future world economy in a more positive way.

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