China Goes Global: The Partial Power - Research Paper Example

Research Paper: Business Contents Contents 2 Executive Summary 3 Introduction 4 Problem ment or Hypothesis 4 Background Section 5 Discussion of Finding 8 Conclusion 11 Works Cited 13 Name of the Student Name of the Professor Name of the Course Date Research Paper: Business Executive Summary The Chinese economy has been one of the fastest growing economies of the modern times. The case of China is unique because it has transformed itself from being a poor country to one the fastest growing economies of the present era. This fact has been increasing concerns in U.S., which is currently the largest economy, regarding future position in the market. This paper has analyzed negative impacts on U.S. economy on account of continuing success of the Chinese economy. This paper has conducted a literature review on the subject matter based on articles, journals and previous research works. It has been found from the analysis that economy of U.S. can be jeopardized if its trade deficit continues to grow. This paper has thrown light upon the fact that the U.S. economy had experienced a number of negative impacts like, high unemployment, lower real wages, rising dependency of financial markets on China and increasing risk of losing the status of a superpower in near future. There may be additional negative consequences on health sector and middle-class of the U.S. The process of weakening of the U.S. economically has already begun and if such conditions persist, then circumstances in the U.S. will worsen. Introduction The economy of China has captured the interest of researchers and investors over past few decades on account of experiencing robust growth. The process had begun when economic reforms were introduced in China during 1980s. The rationale behind the introduction of reforms was to create a paradigm shift from a centrally planned economy under heavy influence of the state to a liberal economy, which would be primarily regulated by market forces. The results from these reforms had been spectacular and were discernable from the rise in rate of economic growth of the nation, in terms of GDP. Prior to the reform period, average rate of GDP growth was 5.3%, which had increased to 9.7% in the post reform period (Breznitz and Murphree 4). The trading position of China in the world economy improved by leaps and bounds as the volume of exports and imports had grown substantially in the post reform period. When China had joined World Trade Organization in 2001, its trade relations with the United States had strengthened and over the years, China had become the leading trade partner of United States (Shambaugh 7). The membership of China with the WTO had been a major step towards liberalization as it has opened the economy of China to the entire world and attracted investments from a large number of foreign countries. A host of countries over Europe, America and Asia are choosing China as a destination of investment. The purpose of this paper is to examine the negative impacts on growth of U.S. economy due to rapid rate of growth in China. Problem Statement or Hypothesis One of the major characteristic of privatization in China was that its pace was very slow and the government was able to maintain a steady control over state owned enterprises. The standard of living as well as labor wages in China is drastically lower compared to that of U.S.A. China is also becoming the most lucrative destination for FDI and in a survey conducted by PWC, it has been estimated that China would surpass U.S. in the forthcoming years (“China remains top destination for foreign investment: PwC survey”). Null Hypothesis: Currently, the US economy is the largest in the world, but soon the Chinese economy will become number one. This change will have no effect on business practice and government regulation in the US. Alternative Hypothesis: The Chinese economy becoming the largest economy in the world will affect business practice and government in the US. Background Section The transformation of China from being a stagnant economy to one of the fastest growing countries of the world have raised a concern among the U.S. policy makers that China will soon surpass U.S. in terms of global trade and in the long run, it will become the leading economy of the world. Hence, rise of China can be equated with the decline of America in long run. This section of the paper studies possible negative impacts of growth of China on the U.S. economy. The first major problem that is being faced by the U.S. in recent times is growth of trade deficit of the nation. Growing trade deficit is essentially unfavorable for any nation as it represents outflow of currency from the home market into the foreign market. This situation corrects itself over time in normal cases. However, it has been observed that particularly in case of the U.S.A., this value is growing consistently. This implies that when foreign nations sell currency of U.S.A, the value of dollar will decline and that of imports would rise. The chief reason for rise in the trade deficit for U.S. is protectionary practices that are followed by the Chinese economy. Some of these activities include trade barriers through tariffs and quotas, low labor wages and maintaining a low value of the Chinese currency. The existing literature points out that rising trade deficit of the U.S.A. can have far reaching consequences on the economy in the long run. Employment is expected to reduce mostly in the manufacturing areas. It has also been observed that the gap between wages of the skilled and the unskilled workers are also increasing on account of rise in trade with China. The adverse impact on the real wages of U.S. workers have received renewed attention in the recent years as trading of U.S.A. with China and other low wage economies have been aggravating this trend (Milanovic 67-68). The underlying reasons for this unfair advantage of the U.S.A. have been identified in practices of China. Trade Barriers: The trade and investment barriers in China are devised in such a way that only exports from China receives a boost, without providing an equal opportunity for its trading partner, U.S.A. Trade barriers reduce the gains from trade particularly for America while China continues to enjoy high growth that could be attributed to the trade surplus. One of the major impacts of growing trade deficit is seen on the jobs sector of U.S. The cheap imports from China are likely to reduce jobs in U.S., which produces similar products. The loss of employment may not occur for the economy as a whole, but trade sensitive areas of economy are likely bear maximum job losses. Protection of government: most of the industrial practices adopted by China have also been devised by the government in a manner, which favors only the state owned industry. For instance, it has been observed in case of steel industry that a legislation passed by the government focuses on preferential use of domestic steel and technologies, which had in turn undermined the steel sector of U.S. Labor costs: Low regulations for environmental conditions in China provide companies operating therein with major cost advantages. As these practices are unacceptable in the U.S.A., companies operating in the country bear higher cost than China. This renders China’s exports to be cheaper. This is the reason for which American firms are lowering labor costs so as to cope with the Chinese costs of production. This can also be considered as the reason for which proportion of cheap imports from China is rising. The second major impact of the rising growth of China through increasing exports can be on wages of the U.S.A. As the wages in China are considerably lower than U.S., equalization component of trade is likely to drive down wages of the American workers (David, Dorn and Hanson 3-4). This factor has been identified as a race to the bottom. This fear has gained relevance from the fact that over last twenty years, the growing level of American trade with China has led to slowdown of the rate of growth pertaining to real wages in U.S.A. Intellectual Property Rights: China is also heavily accused of piracy pertaining to the Intellectual Property Rights (IPR) and this causes significant losses for America. All these reasons collectively contribute towards weakening of the economy of U.S.A. and strengthening of Chinese economy (Wayne M., Marc and Craig). Fifthly, the population of China is way higher than that of U.S.A. and availability of this cheap workforce is primarily the reason, which encourages several major companies to invest in China. These labors are mostly involved in production of goods involving low technology. Nevertheless, threat for U.S.A. is likely to increase if China starts producing products, which are serve direct competition for U.S.A (Palley 17). Monetary Policy: China has been widely accused of undervaluing its currency which in turn provides huge boost to exports while suppressing the exports of its trading partners. Another major problem that has been recognized with rapid growth of Chinese economy is increasing dependency of the U.S. security market on China. In a research conducted by the CRS, it has been found out that rate of savings in U.S.A. is very low and that of China is very high. It is for this particular reason that U.S. depends on capital inflows from other countries to meet investment requirements of the domestic economy and manage its budget deficit. China happens to hold most of the debts of U.S., given that former’s rate of saving is considerably higher. A number of economists fear that the rising debt of U.S. to China will make U.S. weaker in the long run. In fact, a number of researchers have claimed that low-cost inflow of funds in the U.S. was one of the major reasons that had culminated in the financial crisis of 2008 (Wayne M., Marc and Craig). Discussion of Finding The rising trade deficits of U.S. have adverse impacts on jobs of the country. In a recent article that has been published by Economic Policy Institute, it has been estimated that rising trade deficit of U.S. from 2001 to 2011 has already eliminated 2.7 million jobs (“Growing U.S. trade deficit with China cost over 2.7 million jobs”). The loss of jobs has been mostly reported in the manufacturing sector with service sector following closely. The loss of jobs in the manufacturing sector is bound to adversely affect employment rate of U.S.A. in the long-run, if remained unchecked. It has been identified that one of the major factors affecting America for the last two decades is fall in real wages of the country. The considerably higher job losses in the manufacturing sector of the economy are causing major problems to middle-class of the economy. The issue of import competition that is presently being faced by the U.S. economy is mostly affecting the American work force engaged in routine jobs in industries like, apparel industry, toys industry, leather goods and footwear (Dan). So, it can be argued that middle-class in China is growing at the cost of that in the U.S. A major consequence of this will be the rising inequality of income in U.S.A. The process has begun already and has been evident since the global financial crisis, which had crippled the economy of America since 2008. When recovery of the nation had begun, it was increasingly marked by growing inequality. Since recovery of America in the last five years, 93% of the total rise in income went to the top 1% richest population of the country (Irvin 67-68). This is likely to affect the youth as they are continuously plagued by problems of unemployment in the economy. Income inequality has been one of the persistent problems of the U.S. economy, but magnitude of the gap was not alarming. However, the problem has aggravated in recent years. The rising income inequality can cause a host of other problems if not checked. It has been widely documented in the existing literature that growing income inequality causes an overall negative impact on health sector of the economy. Rising health problems in the society implies that efficiency of workers would reduce in the long-run. The expenditure of the government on health sector of the economy increases and this in turn lowers investment and savings of the government further. Therefore, rising income inequality has deeper impacts on the economy as a whole (Edsall, “Is the American Middle Class Losing Out to China and India?”). A major consequence of the growth of Chinese economy is that it is likely to surpass America in immediate future, thereby becoming the world’s largest economy and potentially the biggest superpower. According to estimates released by IMF, the economy of China is likely to overtake that of U.S.A. within this year. This will make America lose its global status, which has been heritage of the country for the last 300 years. The current statistics show that China has already become the largest trading world nation and it is strongly believed that the country will soon become the largest economy as well. The growth of China in recent years has made it top destination among the investors. Alone in 2012, China had attracted $111.7 billion of global FDI (“China remains top destination for foreign investment: PwC survey”). Based on the figure, it has been estimated that China will easily overtake U.S., in terms of purchasing power parity, in coming four years. The growth of foreign investments in China is also one of the reasons, which had majorly contributed to its economic growth. Investments are crucial for growth of any nation as these help in enhancing infrastructure and overall development of the country. This same factor may contribute to the fact of China surpassing the U.S., in terms of growth (Subramanian 6). Another major consequence of the rapid growth of China in recent years is the increasing demand for oil and other raw materials. The rise in demand of these products is likely to raise prices of these products in the long run, which in turn will raise costs of production for all countries, including U.S.A. The piracy of IPR has been one of the allegations that have been faced by China in the recent past (Castells 53). The implication of this is that industries, which are involved in the trading of IPR, will be affected the most. Increasing pirated exports from China will have an adverse impact on the American industries that are producing same products. The implications of the theft of IPR on the economy are grave. This is because IPR is an integral component of innovation and the latter in turn propels job creation. Counterfeit products produced as a result of IPR theft reduces returns on innovation and slows down rate of economic growth. It can be argued based on the current events that rising acts of piracy in the Chinese economy will impact consumers, government and companies alike in the U.S. Companies will lose revenue while consumers purchase products with inferior quality, ensuing adverse results. Governments in turn will lose tax revenue (The U.S. Congress). It has been discussed that China holds a considerable part of U.S. debt securities. The potential problem that can arise from this situation is when China decides to sell the securities in future. The condition is likely to worsen if other economies follow the suit. If this situation occurs, then it is likely to destablilize the entire U.S. economy. Though such a situation will also affect China adversely, yet the greater damage will be experienced by U.S. Most of the economists are not concerned about the large debt per se (Wayne M. and Marc). The main challenge is increasing dependence on foreign capital and the issue of its sustainability. The impact on the financial markets is hard to determine as a fall in the value of dollar due to selling out would boost exports from the American economy, while the same firms who benefit from rising exports will face the challenge of borrowing as rate of interest would also rise with depreciating value of dollar. The major challenge that U.S. economy can encounter due to such a situation is loss of confidence of investors on dominance of dollars. High volatility of the dollar may end its reign as the most reliable currency for world reserve. Conclusion This paper has analyzed effect of rapid growth of the Chinese economy on the U.S. market. It has been found that growth of China that has occurred in recent years is mainly at the expense of the U.S. The entry of China in the WTO has considerably weakened position of U.S. in global trade. This is because exports from China are on meteoric rise, unlike that of the U.S. The high trade surplus of China is resulting in its rapid growth. A number of factors have been recognized, which can cause major harm to the U.S. economy in the long run. Firstly, as per the statistics, there have been heavy job losses in the manufacturing sector. This can aggravate issue of unemployment in the country. Secondly, real income of the economy has stagnated, which have negatively impacted quality of individuals’ lives. The income inequality of the country has also been rising in the recent years. Thirdly, China has improved remarkably in terms of purchasing power parity and economic growth and current statistics indicate that the country will soon emerge as a major power, surpassing America. Finally, financial and securities market in U.S. have high chances of facing economic distress if China decides to sell major portion of its foreign reserves in future. As a result, volatility of U.S. dollars will weaken its position in the global economy in long run. Based on these facts, it can be claimed that the original hypothesis formulated at the beginning of this paper has been validated as it is evident that rapid growth of the Chinese economy is severely weakening the position of U.S.A. relative to China. This is bound to impact quality of life of the Americans. The impacts of rising trade deficit and growing debt of the U.S. economy due to unfair trade practices of China has deeper long-term implication on the economy of America. For instance, rising trade deficit not only affects balance of payments, but also hampers job environment. Similarly, rising inequality of income raises level of health sector problems in the economy and so on and so forth. Therefore, it can be confirmed that U.S.A. would indeed be impacted negatively due to growth of China. Works Cited Breznitz, Dan and Michael Murphree. Run of the red queen: Government, innovation, globalization, and economic growth in China. New Haven: Yale University Press, 2011. Print. Castells, Manuel. The rise of the network society: The information age: Economy, society, and culture. New Jersey: John Wiley & Sons, 2011. Print. “China remains top destination for foreign investment: PwC survey.” PWC. PWC, 2013. Web. 27 May. 2014. David, Harry, David Dorn and Gordon H. Hanson. “The China syndrome: Local labor market effects of import competition in the United States.”(2012): 2-23. National Bureau of Economic Research. PDF File. Edsall, Thomas B. “Is the American Middle Class Losing Out to China and India?” The New York Times. The New York Times, 2014. Web. 27 May. 2014. Glickman, Dan. “China’s Growth and trade: Consequences for the US Economy.” The Aspen Institute 27.1 (2012): 1-29. The Aspen Institute. PDF File. “Growing U.S. trade deficit with China cost over 2.7 million jobs.” EPI News. Economic Policy Institute, 2014. Web. 27 May. 2014. Irvin, George. Super rich: The rise of inequality in Britain and the United States. New Jersey: John Wiley & Sons, 2013. Print. Milanovic, Branko. Worlds apart: measuring international and global inequality. Princeton : Princeton University Press, 2011. Print. Morrison, Wayne M. and Marc Labonte. “China’s Holdings of U.S. Securities: Implications for the U.S. Economy.” (2013): 2-19. Congressional Research Service. PDF File. Morrison, Wayne M., Marc Labonte and Craig K. Elwell. “Is China a Threat to the U.S. Economy?” (2011): 4-57. Congressional Research Service. PDF File. Palley, Thomas. “America’s flawed paradigm: macroeconomic causes of the financial crisis and great recession.” Empirica 38.1 (2011): 3-17. Web. 27 May. 2014. Shambaugh, David. China Goes Global: The Partial Power. Oxford: Oxford University Press, 2013. Print. Subramanian, Arvind. “Inevitable Superpower: Why Chinas Dominance is a Sure Thing.” The Foreign Affairs 90 (2011): 1-66. Web. 27 May. 2014. The U.S. Congress. “The Impact of Intellectual Property Theft on the Economy.” (2012): 1-4. Joint Economic Committee. PDF File. Read More