Trade relations between USA and China - Essay Example

The international trade relations between USA and China are of critical importance to the global economy. The two gigantic economies take the first and second positions respectively on the world’s largest economies table, speaking in terms of the nominal GDP. Moreover, China is the fastest growing major economy on the planet right now. Since the economic liberalization began in China in 1978, China has emerged as an export-driven economical force. Although USAA is the biggest importer of Chinese goods and commodities today, the trade relations between the two countries have undermined during the last few years. Ranging from the ongoing currency war to accusations of immoral trade policies, factors which have led towards this destabilization of trade relations are not only economical but, perhaps, have a political milieu too. Firstly, one of the major challenges faced by the USA-China trade is the prominent USA accusation of ‘manipulating’ the Chinese currency. Over the past few years, the official currency of China, Yuan, has been held in a floating exchange rate system; though it has only been allowed a narrow margin to fluctuate. Many analysts and economists in the USA however urge for a more flexible exchange rate which pivots around the market equilibrium determined by the market forces of currency demand and supply. Despite of the fact that Yuan has been allowed to fluctuate more liberally and has even risen by 20% in value against the USA Dollar since 2005, Japan, European Union and USA yet accuse China that it manipulates its currency by deliberately keeping it at a low exchange rate in relation to the USA Dollar with a view to make the USA products less competitive and, simultaneously, the Chinese goods and services more competitive and relatively cheaper than the USA goods. This lowered currency rate leads to a rise in Chinese exports whereas USA exports decline. A large amount of trade deficit suffered by the USA in trade with China adds to the gravity of the accusation. Concerns for China regarding this issue are that the USA, World Trade Organization or APEC might impose trade sanctions on China for its ‘problematic’ currency exchange rate. These sanctions may prove very costly for the growing Chinese economy as the world’s second largest economy is principally led by mass amount of exports to its trading partners. Restrictions over free trade for China may cause the deceleration of its growth or may even put it to a halt. The trade balance between USA and China in 2011 exceeded $295 billion and any probable sanctions may drastically affect this huge amount of traded commodities between the two giants. Moreover, China’s Current Account surplus has also been declining during the past few years and the consequences of USA pleas regarding the unfair trade advantage China has may turn the ‘already withering’ surplus into a trade deficit, whereas China may also lose its most important trade partner (Davis). The list of allegations upon China is elongated and does not restrict itself to the currency devaluation. China is also accused by the USA for adopting an unfair exchange rate regime. Yuan’s rate of exchange has been, contrarily to the US allegations, in conformity with the international monetary system which is operating at the time. Observing the variations from a fixed to a floating and then from the fixed peg to a basket peg, China’s exchange rate valuation has always been repudiated by USA. This might lead to a further withering of trade relations between the two nations in the near future. (Moosa viii) Also, on the accusation list is the allegation upon China of piling up its foreign reserves. Again, the charge seems to be lacking ample rationality as any nation is allowed to purchase foreign currency reserves and to accumulate those reserves in order to minimize its risk of a speculative economic slump in the future. Similarly, China has done the same and has acquired pretty huge amounts of US Dollars in the recent past to be able to pay its foreign debt and to decrease its risk status. However, this move has been seen the US as an attempt to sweep away US currency from the market, and simultaneously to further appreciate the US dollar, which would in turn mean more expensive and hence less competitive US commodities. Gagnon and Hufbauer have thrown light upon the US proposal of introducing a withholding tax on the interest paid to China in respect of the US Treasury bonds it possesses. This apparently is another attempt by the ever-whining Chinese trade partner to discourage Chinese purchase of US currency in bulk. (Moosa 191,195) Furthermore, China also suffers attacks on its comparatively low national consumption rate. Many people in USA demand for a consumption-oriented China rather than a high-saving one. Yet another attempt to discourage the rapid Chinese growth, this allegation also depicts the hatred amongst its partners, and particularly USA, for the rising trade power of China. Although many justifications have been put forward to act as reasoning for this charge, all of them lack strength. (Moosa 196) Considering some facts, The US- China trade balance has over the last decade risen at a steady rate which portrays that the two nations still maintain economically-good trade relations. The trade balance between the two economies has grown from $121.5 billion in 2001 to an astonishing $503.2 billion in 2011. However, the increasing trend has not, at least apparently, benefitted both the nations. US trade shortfall with China has increased from $83 billion in 2001 to $295 in 2011, thus describing the once-existent shriveling US trade dominance in the global international trade market and also somehow justifying the gravity of the US accusations against China for its trade policies. (US Department of Commerce; US International Trade Commission (ITC)) All these accusations aggregated together with the domestic problems of rising inflation, increasing competition among the international trade market, the deepening US trade deficit with China and the concerns regarding maintaining a sustainable growth rate for both China and USA sum up the challenges faced by international trade dealings among the two countries. Furthermore, although USA superseded other nations to stay the largest trade partner of China in 2010, with a trade volume between the two countries amounting to $385 billion, the cold currency war between the two nations and the increasing economic hostility among the citizens may bring results contrary to the present and might prove lethal for the international trade between the two economic giants. (PRC General Administration of Customs, China's Customs Statistics) Works Cited Davis, Marc. "Problems Loom For The Chinese Economy." Investopedia – Educating the world about finance. N.p., 5 Apr. 2012. Web. 2 Dec. 2012. . Moosa, Imad A. Us-china Trade Dispute: Facts, Figures and Myths. Cheltenham, UK: Edward Elgar, 2012. Print. US Department of Commerce; US International Trade Commission (ITC) PRC General Administration of Customs, China's Customs Statistics Read More