CRITICAL ANALYSIS OF THE TRADE IMBALANCE BETWEEN THE US & CHINA

Introduction

A number of reasons have been put forward to explain trade imbalances between the United States and other countries. Most of often than not, the US tends to shift blame from themselves to their counterparts. In this case, the US-China trade imbalance has solicited a lot of blame from different stakeholders in these two countries. Some assert that the United States’ macro-economic policies are to blame for this while others claim that there is a need to visit the issue of capitalism and the business approach in China. This paper will attempt to look at both sides of the coin in order to come up with reasonable recommendations on how these two countries can tackle the issue.

A)Sources of trade imbalance
The trade imbalance has been caused by excessive financial activity from one group and minimal activity from another. In this case, China takes the role of a creditor to the United States. This is normally done by purchasing the US treasury bonds whose overall result is an overdependence on the Chinese market by the United States. This is actually the reason why shares within the US are highly affected when something goes wrong in the Chinese stock market.

In the nineteen sixties, the US took pride in the fact that they were the only creditor nation in the world. At that time, there was a cold war policy that prohibited the US from participating in trade with China. The US had a reserve currency based on gold thus ascertaining that any country that borrowed from them would meet their payments.

Besides the latter, the United States was doing well economically because of the fact that foreign exchange markets were controlled and monitored by the government, this meant that the issue of dollar hegemony did not crop up at that time. However, with the passage of time, things began taking a turn for the worse. The Cold war came to an end and countries were now free to go about trading without consideration of the geographically distances between the respective traders. Additionally, the US’s reserve currency was no longer founded on gold; instead it was based on the country’s geographical and political prowess. This left a lot of room for financial deficits. In the nineteen nineties, the United States became the country with the highest trade deficit within the international arena. Consequently, the same principle was also applied when the country was trading with China.

China’s trading policies were also largely to blame for the trade imbalance. This is because ever since the Asian boom, China became a country that relied heavily on its exports and on international trade. The domestic Chinese market does not account for much of the country’s trade surplus and this has eventually affected their trading levels with other countries of the world. This dependence on exports and investment is what has caused a number of US leaders some concern about China. Two years ago, the US president George Bush urged China president Hu Jintao to consider opening up its domestic market in order to absorb some of the US’s exports. The latter president believed that if China were to do this, then it could offset the huge imbalance that existed between the two countries.

In order to understand just how serious this problem, it is necessary to look at facts and figures over the past few years depicting trade between China and the US. As it can be seen from the table below, the value of imports from China to the US is always much higher than the value of the exports that the US normally takes to China. The United States Census Bureau has been tracking the US’s negative trade balance since the nineties. While the net value of the imbalance has been increasing, one cannot help but notice the fact that it has been negative over the past ten years. The tables only show what went on this year and in 2006. Other years have not been included but they indicate similar results as these ones below;
US trade with China in millions of dollars (2008)
Month Exports Imports Balance
January 2008 5,854.9 26,167.7 -20,312.8
February 2008 5,773.9 24,128.6 -18,354.7
March 2008 6,354.1 22,432.0 -16,077.9
April 2008 5,680.6 25,919.3 -20,238.6
May 2008 6,614.3 27,663.6 -21,049.4
June 2008 6,413.7 27,843.3 -21,429.6
July 2008 6,437.3 31,314.0 -24,876.8
August 2008 6,506.7 31,840.2 -25,333.5
TOTAL 49,635.5 217,3

US trade with China in millions of dollars (2006)
Month Exports Imports Balance
January 2006 3,479.4 21,382.5 -17,903.1
February 2006 4,098.4 17,905.4 -13,807.0
March 2006 4,958.9 20,531.3 -15,572.4
April 2006 4,328.4 21,459.1 -17,130.7
May 2006 4,500.9 22,317.6 -17,816.7
June 2006 4,348.0 23,989.7 -19,641.7
July 2006 5,060.0 24,632.0 -19,572.0
August 2006 4,758.2 26,713.3 -21,955.2
September 2006 4,644.6 27,570.6 -22,926.0
October 2006 4,991.3 29,388.6 -24,397.3
November 2006 4,809.1 27,775.1 -22,966.0
December 2006 5,208.6 24,109.2 -18,900.6
TOTAL 55,185.7 287,774.4 -232,588.6
Source: US Census Bureau (2008): Foreign Trade Statistics, available at http://www.census.gov

B) visible trade and visible trade
1) Visible trade e.g. borrowing
One of the major factors causing this deficit is the US culture. The US operates in such a manner that it concentrates on borrowing rather than saving. In fact in the year 2000, these patterns began cropping up after the government decided to relax their monetary policies. Instead of dealing with the issue square on, the latter country went on borrowing and spending their money haphazardly. One of the countries that were more than eager to lend to the United States was China thus causing a ballooned import scenario within the United States.

However, one would ask themselves what caused US traders this kind of inclination towards borrowing. The first reason was that there was a housing boom. Many investors felt that they could borrow against their rising property values and then spend that money since the value of their housing sector would continue rising. However, this was a big misconception owing to the fact that most of them ended up spending much more than they could save. In fact, estimates show that consumer spending within the US had increased by close to sixty eight percent.

China on the other hand was very ready to feed this spending frenzy because their economy was based on labor intensive commodities or sectors. The US had a high demand for commodities and China was more than willing to feed this demand.
Imports from China have dominated US trade in such a manner that imports from other South East Asian countries no longer matter. China has now changed to become one of the assembly points for the Asian continents. Whenever other countries such as Taiwan, Hong Kong and Japan produce certain components of an item, they usually take it to China for completion. Consequently, the US is concentrating on a substantial number of items from the Chinese market but what they do not realize is that they are now buying less from other Asian countries that could still have participated in the manufacture of the commodity.

There are a series of US made goods that are not included in trade balance calculations. In fact, some groups assert that close to sixty percent of all Chinese goods are made by foreign companies. Consequently, China is getting credit for goods that are actually made by other governments. For instance, the Apple IPod is designed and engineered in the United States. Additionally, most of its components are made in the US; however, because of cheap labor costs in China, these components are then taken to China for assembly. Consequently, some Chinese exports are actually US goods created there and then sold by to the Americans.

In close relation to the latter argument is the fact that certain US sales are undervalued in trade balance calculations. Many US experts normally take their consultancy or technological skills to China. These are all service based sectors yet the US does not recognize this aspect during their calculations.

Very many groups within the US have talked about the issue of outsourcing as a likely cause for trade imbalances. In other words, most US companies transfer their production based services to China and this has affected many US workers. In fact, such a scenario has caused a lot of political interest in the issue of trade with China. Some economists argue that this is not a valid argument because the benefit of buying commodities at fair prices from China outweighs the job losses brought by outsourcing. This argument may be true in certain scenarios but one cannot ignore the disadvantages created in other scenarios. When production based technologies are transferred to China, the losses caused are concentrated among a smaller segment of people and their losses can be felt almost immediately. However, the low prices offered by Chinese markets are usually loses difficult to detect because these low costs are distributed across different parts of the country.

Invisible trade e.g. treasury bonds
China has been buying United States treasury bonds over the past few years. This means that the Chinese are lending their exchange reserves to the United States. Consequently, the United States has become accustomed to benefitting from the returns made through bond purchases. However, China is getting a better deal in this regard because of the fact that they are earning from the interests acquired from US’s bonds.

Another major issue that could be causing this trade balance is currency
difficulties. The US dollar has a much higher value than the Yuan. The overall result is that commodities from China will be deemed as cheaper ones while those ones from the US will become less expensive. Consequently, the failure of both the US and the Chinese governments to look into these issues is creating a situation in which their economies are suffering. Both governments have not bothered re-evaluating their currencies most especially because it is a tedious and painstaking process. This lack of enthusiasm is very disturbing owing to the fact that China and the US are heavily dependent on each other for trade. China is the most important trading partner to the US while the US is the second most important trading partner for China. This situation denotes the fact that both countries have to consider how they can streamline business with one another through their currencies.

It should be noted that forces of globalization have a very large part to play in this scenario. China represents exactly what can happen when the world’s economies have become integrated. These forces of globalization came unexpectedly and suddenly into the United States yet workers in the latter country had not prepared for it. Many workers had not been retrained to take up a different category of work and this has left a sort of vacuum. That vacuum is what can be seen as a trading imbalance.
In close relation to this argument is free trade, many economists argue that free trade could free up the country’s economy and create a scenario in which the US can benefit tremendously from it. However, if people are not well equipped to handle free trade, then there may be problems in the future when the latter countries try to cope with it.

What makes the trade balance difficult
This trade balance is particularly difficult to deal with owing to the fact that considerable number of traders within the United States and China has grown accustomed to trade conditions between these two countries. In the United States for example, many US consumers are fond of buying Chinese commodities because they are much cheaper than locally made ones. In fact, statistics indicate that United States consumers saved up to six hundred billion dollars worth of products thanks to Chinese commodities.

Statistics also indicate that many household commodities come from this country (China) regardless of the sector under consideration. For instance, when US consumers want to buy sneakers; they buy Chinese, when they need toothpaste; they buy Chinese even the mattresses that they require to sleep at night are all obtained from the Chinese market. The overall result of this issue is that many people have become accustomed to Chinese goods. If these products are no longer accessible, then they would not have such an easy target for saving their money.

C)Ways out of the trade imbalance
There is indeed a solution to these trade imbalances. First of all, there is no common or standard method for measuring trade imbalances in the latter countries. For instance, time and time again China has claimed that their trade balances are much lower than what the US censuses have found. The following were statistics released by US and China in the Year 2004 about their balance of trade
• US- 160 Billion dollars
• China- 80 Billion dollars
During this year, the reasons for these discrepancies were; China relies on a free on board system. In other words, insurance and other freight costs are not included in their trading calculations. This creates substantial differences between records in the US and those in China. Besides these China usually incorporates the net effect of trade in services between these two countries yet this is not the case for its counterpart.

The United States on the other hand relies on goods origin system. Americans normally incorporate all the goods that they have sold to other countries that eventually get sold to China. For example countries such as South Korea, Japan and other South Easterners obtain goods from the US which is eventually sold to China. According to the US, these exchanges still form part of the calculations.

In order to deal with these differences in calculations, China and the United States need to come up with a comprehensive system that eliminates these differences in statistics as they are costing the latter two countries in visible ways and in less obvious ways.

The second issues that these two countries need to tackle are the structural differences inherent in their trading systems. In other words, the types of goods or services considered in exports or imports need to be balanced. For instance, many Chinese products are mostly low end products such as toothpaste, blankets, toys etc. However, the US usually concentrates on high end services. It is a known fact that the latter country is a hub for science and technology. However, China is not taking advantage of this fact because they only import ten percent of their high end technologies from the United States. China should think of rechanneling some of their energies towards the adoption of these various categories of their items. This also means that the US needs to heighten their marketing levels in China so as to ensure that China looks to their market to import technologies instead of centering on other countries that may not be as qualified or as effective as the US.

China and the United States need to look for ways of complementing their trade deficits. For example, the US can identify which areas of the economy are in dire need of imports or exports and then obtain these products from China. A good example of how this can be done is through the utilization of Chinese textiles. The US requires exports urgently in this sector because Chinese made textiles are made quite cheaply compared to US made ones. Consequently, if the country was to halt these exports, then chances are that they would still have to compete with products emanating from South American countries such as Brazil.

Another way in which these two countries can synchronize their trade balances is through encouragement of mutual trade in services too. When one analyses a ship travelling from China to the US, one is likely to find that the ship is very full. However, when one examines a ship travelling from the US to China, then it is likely that the ship will be empty. The major reason behind this is that the US mostly offers financial and consultancy services to China and most of these experts are exported to China through air. Additionally, the US heavily relies on its technological field such as through micro chips and the like. These are minute products that need not be transported through water. The two countries can solve this discrepancy by looking for ways in which the latter structural problem can be handled thus creating a visible return in investment for the US.

D)United States and Chinese government responsibilities in the trade imbalance
Political solutions also have to be sought in order to cope with these problems. However, trying to dash to aggressive policies that result in protectionist tendencies are not the best way to go. Following statistics released by the US census Bureau in 2007 concerning trade between China and the US, it had been found that the net exports of commodities to China from the US amounted to sixty five billion dollars. However, imports from China to the US amounted to a whooping two hundred and fifty six billion dollars. Many US legislators expressed their displeasure with these amounts. Most of them claimed that there was a need to impose serious tariffs against Chinese imports in order to minimize these balances. However, such extreme approaches will not work because US legislators will not have worked out an amicable solution for minimizing these discrepancies.

The United States needs to own up to their end of the bargaining by informing their policy makers (politicians) about what could be really causing these deficiencies. One of the misconceptions that have arisen concerning Chinese trade is that their trade policies target restricting access to their domestic marketing while at the same time encouraging greater exportation from their own countries. However, Statistics reveal otherwise.

While China used to impose heavy tariffs and quotas on trade during the nineteen eighties, this is no longer the case today. As of 2005, China implemented requirements laid out by the World Trade organization concerning certain elements of trade. Consequently, some of the tariff protection offered for local producers in China is one of the lowest in the world. This allegation is therefore untrue and should not be used to blame China for the US’s poor performance.

The Chinese government needs to realize that the surplus of their commodities are going to China not as a result of labor based arguments as many have asserted, the real issue is that the United States simply buys more commodities form China than vice versa. For instance, it has been argued that since eighty five percent of US footwear comes from China and eighty percent of their toys come from the latter country too, then the US could be relying on these services or products a bit too much.

However, the real issue is that the US had stopped producing most of these goods some years back, in fact, the commodity based industry was replaced by the service and financial services sector some years ago. Consequently, the US is merely rechanneling their energies to exportation of micro processors, aircrafts, machinery, semiconductors and iron ore. The US government needs to accept the fact that they have not aggressively marketed their products to the Chinese market hence the discrepancy.

Conclusion
Many economist, politicians and traders have tried solving the equation of imbalanced trade between China and the US. However, in order to address these issues, then the latter groups need to look for the root cause of the problems.
Some of the misconceptions that have arisen in the past about Chinese trade include; complacency on the part of US trading policies and excessive import tarries on the side of the Chinese economy. However, the real reason behind the imbalance include; poor saving culture in the use, poor preparation for forces of globalization, purchasing treasury bonds from the US by the Chinese and a lack of standard mechanisms for calculating trade imbalances.
Possible solutions to these problems include harmonizing calibers for measuring trade imbalances, creating more room for service based factors in trade balance analysis and reevaluating currency values.

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The author of this article is a holder of Masters in Business Administration (MBA) from Harvard University and currently pursing PhD Program. He is also a professional academic writer. SuperiorWriters.Com>