“The U.S. Trade Deficit with China – Pros and Cons for U.S. Businesses and Consumers”

By Patrick T. Kerner

 

In 2005, The United States trade deficit with China rose to $201.6 billion.  This number, which has been steadily rising over the past several years, is the highest deficit the United States has ever had with one nation.  In the past, the United States, as an economic leader, has fulfilled the responsibility of assisting developing countries in their pursuit of establishing a sound economic system.  China was no exception, as we have been a main trading partner of theirs, assisting in their economic growth.  However, now that China has achieved economic success on the world scale, they are no longer in need of our assistance, but the tables have turned and now we have become dependant on them.  With such a dependence on foreign goods, many fear that our economic future and national security are at risk.  As the manufacturing industry continues to dwindle at home here in the US, China has become a manufacturing powerhouse.  Trade with China has lead to many other criticisms as well; however, when looking at the big picture the United States economy will benefit in the long run from trading with China.

 

This record high deficit with China, which increased approximately 24.5% from 2004, has incensed more criticisms of the current free trade policy.  Those who are opposed to the current free trade policy have criticized the Bush administration for being too lenient with China.  Critics state that the trade deficit will keep enlarging unless the government becomes more aggressive towards the unfair trade practices associated with China.  They argue that China has gained a huge advantage over America because their government intentionally drives down the value of their currency, making their goods cheaper for American consumers, while American products would be more expensive over in China.  This is the main argument as to why the trade imbalance has soared over the past couple of years.

 

Another contention made by those who are dissatisfied with the current trade agreement is that too many manufacturing jobs are being outsourced to China.  For many years now, the United States manufacturing industry has been losing their share of the global market.  China has been able to consistently expand their manufacturing industry due to a weaker currency, which results in cheap labor.  Essentially, it only makes sense for foreign manufacturers to have their hands in China.  They have been able to supply exports of cheap manufactured goods, consisting mainly of textiles, to the United States.  However, the goods that China imports from the Unites States tend to be expensive technologically advanced products, resulting in a small demand for these goods.

 

Those who support the current trade policy are confident it will have long-term benefits for our economy.  A study that was conducted by Oxford Economic Forecasting recently was released by The China Business Forum stating that the “…trade relationship with China has been a huge blessing for the U.S. economy.”  Due to China’s recent entry into the World Trade Organization (WTO), they have made economic reforms and have altered their trade laws to meet with WTO guidelines.  These reforms will positively affect the United States economy.  The report shows that by 2010, trade with China will result in a substantial increase of approximately 0.7% in the national gross domestic product.  Paired with a drop in prices up to 0.8% resulting from China’s reformed trade policy, this translates into an increase of up to $1000 of disposable income per family per year by 2010.  With this significant increase in disposable income, increased spending will result and thus, will directly benefit the United States economy. 

 

Another important aspect of this report to consider is the fact that it is able to refute the criticism of job loss in America.  US employment, as it has been for several decades now, is shifting away from manufacturing and towards service.  Expanding trade with China, however, will help facilitate this process.  Since 2000, manufacturing jobs have steadily decreased, amassing to 205,000 jobs already lost and a projected 500,000 by 2010.  US employment jobs in manufacturing will continue to fall, but service jobs will increase.  Jobs in the distribution industry as well as other service industries will expand, and there will be no significant change in the long run. 

 

In response to the overwhelming dominance China has been able to have in exporting textiles to the United States, the United States has recently implemented a comprehensive bilateral textile agreement.  Signed in November, the agreement went into effect January 1, 2006, helping to make trade with China more stable and predictable.  Quotas will be set in place, creating a trading environment that will be fairer for American businesses and American workers.  Also, the arrangement will help regulate and hopefully avoid overshipment from China.  Lasting through 2008, this agreement should be effective in equalizing trade and reducing the trade deficit.  The application of this policy shows that the United States is trying to combat the deficit while continuing with the free trade policy.  The world is becoming a smaller place, and as a result, protectionism and an isolationist trade policy with China would not work in this global economy.  We no longer live in the day where a tariff will help US business gain a competitive edge.  Hindering trade would end up hurting the US in the long run, forcing consumers to pay more for what are now cheaper products.  This translates in less spending due to a smaller disposable income, and essentially, hurting the US economy.

 

Trade with China will turn out to be beneficial to the United States. Trade, although still considered to be a free trade policy, has started to become more regulated.  In conjunction with the reforms that China has made to their trade laws, the United States will start seeing direct positive results in the form of a higher disposable income.  Therefore, continuing with the current trade policy would not only benefit the consumer, but with increased spending, business, as well as the economy as a whole, will feel the positive effect of trade.

 

Bibliography

  • “American Trade Deficit Reaches an All-Time High.” @ http://www.msnbc.msn.com/id/11270337/#storyContinued
  • Britton, Eric. The Chinese Forum.  “The China Effect: Assessing the Impact on the US Economy of Trade and Investment with China.” January 2006.
  • “’Substantial Benefits’ from China Trade?” @ Buisnessweek.com/bwdaily/dnflash/feb2006/nf200628_2804_db039.htm?campaign_id=topStories_ssi, 5. February8, 2006.
  • “U.S., China Sign Comprehensive Bilateral Textile Agreement.” @ http://usinfo.state.gov/eap/Archive/2005/Nov/08-280197.html

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