The Impact of the Chinese Economy on the US Economy - Research Paper Example

Table of Contents Executive Summary………………………………………………………………………3 2. Introduction……………………………………………………………………………….4 3. Hypothesis Section………………………………………………………………………..4 4. Background Section……………………………………………………………………….5 4.1. Trade …………………………………………………………………………………5 4.2. Labor costs……………………………………………………………………………6 4.3. Government regulation and support………………………………………………….7 4.4. Fiscal and monetary policy …………………………………………………………..8 4.5. Intellectual property protection……………………………………………………….9 5. Discussion of Findings (Research)………………………………………………………10 6. Conclusion and Recommendations………………………………………………………12 7. Works Cited ……………………………………………………………………………..14 The impact of the Chinese economy on the US economy in the long term, especially considering the fact that the Chinese economy will soon be the largest and the US the second 1. Executive Summary China’s economic growth over the last two decades has been considerable. According to forecasts, the Chinese economy will soon be largest economy in the world, replacing the USA on the second place. Assuming that the forecast that the Chinese economy will overcome the American economy soon, there were tested two hypotheses: that the Chinese economy becoming the largest economy in the world will have no effect on business practice and government regulation in the US and that it will affect business practice and government in the US. Based on the analysis of such economic and economy-related factors as: trade activity, labor costs, government regulation and support, intellectual property, fiscal and monetary policies there has been drawn a conclusion that the Chinese economy becoming the largest economy in the world will affect business practice and government in the US. 2. Introduction China has achieved rapid economic growth over the last two decades, approaching the largest world economy – the USA. Thus, for example, during the periods from 1999 to 1995 and from 2005 to 2007 increase of China in world GDP share exceeded 4,8% and 9,8% respectively (Agarwal 181). Based on the purchasing power parity indicator, Chinese economy takes the second largest in the world as well in unadjusted US dollar terms (Buckley n.p.). While the share of China in the increase in world exports is growing, the share of the USA shows decreasing trend (Clark & Monk 100). The experts forecast that China is one of the leading countries that will undercut the role and significance of the USA as the global superpower and will reshape the structure of the global economy through the twenty-first century (Clark & Monk 100). Assuming that the forecast that the Chinese economy will overcome the American economy and thus will become the largest economy in the world, there is not much evidence on how it will effect on business practice and government regulation in the US. The purpose of this research is to analyze the impact of economic leadership of China on business practice and government in the US through developing and testing the relevant hypotheses. 3. Hypothesis Section In order to carry out the research on the impact of the Chinese economy on the US economy in the long-term perspective there were formulated two hypotheses. Both hypotheses are based on the fact that soon the Chinese economy will become number one. Taking for granted this aspect, here are the hypotheses that will be researched: Null Hypothesis: The Chinese economy becoming the largest economy in the world 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. 4. Background Section 4.1. Trade Trade activity: the United States The USA has exported its goods for $ 1, 278, 494.500 mln, $1, 480, 290.400 mln, and 1, 545,708.700 mln in 2010, 2011, and 2012, respectively. While the value of imports during three years period from 2010 to 2012 has significantly overcome the value of exports. The USA has imported goods for the total value of $1, 969, 183.800, $2, 265, 894.000, and $2, 335, 536.400 in 2010, 2011, and 2012, respectively (IMF, International Financial Statistics, n.p.) Trade activity: China During the period of 2010-2012, Trade activity in China was characterized by continuously growing exporting activity. Thus, China has exported its goods for $ 1, 578, 269.18 mln, $1, 899, 182.01 mln, and 2, 048, 940.00 mln in 2010, 2011, and 2012, respectively. The value of imports during the three years period from 2010 to 2012 also has been growing. China has imported goods for the total value of $1, 396, 195.00 mln, $1, 742, 851.00 mln, and $1, 817, 780.24 in 2010, 2011, and 2012, respectively (IMF, International Financial Statistics, n.p.) Balance of trade: the United States Based on the trade activity of the United States it is possible to calculate the balance of trade. Thus, for example, the balance of trade for the USA was in deficit: $ 690 689 mln, $785 604 mln, and $789 828 mln in 2010, 2011, and 2012, respectively. Balance of trade: China Based on the trade activity of China it is also possible to calculate the balance of trade for the country. Thus, for example, the balance of trade for China was in surplus: $ 182074,18 mln, $156 331,01 mln, and $ 231159,76mln in 2010, 2011, and 2012, respectively. 4.2. Labor costs Labor Costs – United States Labor Costs in the United States show continuously increasing tendency during a long period of time. Thus, the average Index Point in the US during the period from 1950 until 2014 is 58, 05 (Tradeeconomics.com, n.p.). During the 54 years period, the lowest Index Point of 18, 26 was recorded in the 1950, while the highest Index Point of 104,5 was recorded in 2012 (Tradeeconomics.com, n.p.). According to the U.S. Bureau of Labor Statistics, Labor costs in the United States increased to 103, 73 by the first quarter of 2013, and will continue to increase in the future (Tradeeconomics.com, n.p.). Labor Costs – China On the contrary to the US Labor Costs in China show continuously decreasing tendency during a period from 2011 to 2014. Thus, the average Index Point in China during the period from 2012 until 2014 is 108, 50 (Tradeeconomics.com, n.p.). According to the National Bureau of Statistics of China, Index Points in the first quarter of 2014 achieved its lowest record of 106, 90. It is forecasted that labor costs in China will continue decrease in the future (Tradeeconomics.com, n.p.). 4.3. Government regulation and support Government regulation and support in the USA In general, Government regulation and support of business is viewed more as complicated and excessive rather than helpful. In the early twentieth century the country’s government has enacted anti-trust laws, restrictive regulatory laws governing the conduct of business, and increases in corporate tax rates (Davis n.p.). After the corporate frauds that ended with scandals with such giants as Enron, WorldCom and Tyco, the US government has introduced the Sarbanes Oxley Act which currently regulates such major areas as audit and accounting. Some other regulatory laws in relation to business include the Environmental Protection, regulations on initial public offerings (IPO) and some other regulations of SEC (Davis n.p). On the other hand the US government provides significant support to business by offering assistance programs (grants, training and advice services or information) to businesses (Davis n.p). Government regulation and support in China Recently, the Chinese government has enacted some significant regulatory changes in relation to bank-lending, monetary and fiscal laws. These laws have contributed positive benefits to the overall China’s GDP growth since 2009 (US Commercial Service, 1). The Chinese government is planning to increase consumption activity up to 50% by 2015, comparing to 35% in 2010 (US Commercial Service, 1-2). This might provide to opportunities for increase of the US export to China. Comparing current legal and regulatory system of China with the US system, it is possible to claim that there is a huge gap between the two countries mainly because of the fact that law implementation in China is not consistent. China’s economy model is a planned economy, whereas government has 5 year’s strategic plans and economic goals (US Commercial Service 2). 4.4. Fiscal and Monetary Policy Fiscal and monetary policy – the USA Fiscal policy of the USA is not balanced and gradual enough; it also remains unsustainable over the long-term (IMF Country Report - USA, 12). The fiscal deficit of the country in 2013 is declining; however, there is a need for approving a plan for restoring long-run fiscal sustainability (IMF Country Report - USA, 1). The general government deficit has increased from over 13% of GDP in 2009 to 5, 9% of GDP in 2013 (IMF Country Report - USA, 13). Lower defense spending, cyclical rebound in revenues, and savings from legislated measures are the initiatives, favorable interest rate-growth differential are the factors that should have shrink over the budget deficit (IMF Country Report, 13). However, aging population, the gradual normalization of interest rates, and healthcare costs on spending would widen the budget deficit in long-term perspective (IMF Country Report - USA, 13). Automatic spending cuts are projected to reduce the economic growth in short term and also it could undermine potential through indiscriminate cuts to infrastructure, science and education spending (IMF Country Report - USA, 12). Low interest rates may entail potential consequences for domestic financial stability; there is a need to avoid the risk of long-term structural unemployment, which could lead to lower potential GDP output (IMF Country Report- USA, 21). Currently, there are undertaken some policies aimed at emphasizing labor market initiatives: extension of emergency unemployment benefits for 2013, maintenance of training and employment programs for dislocated, disadvantages and low-income youth (IMF Country Report - USA, 21). Fiscal and monetary policy - China Monetary policy in China is aimed as “stabilizing investment” in transportation and infrastructure projects, and implies monetary easing to provide short-term liquidity (JP Morgan 1). Fiscal policies enable China to internationalize use of RMB deposits; thus the RMB has moved upwards to the 14th position in the rank of global payment currencies comparing to the 35th position in 2011 (JP Morgan 1). China has implemented some other fiscal policies that have contributed to the rapid growth in trust, corporate bond activity and wealth management products (WMP). By 2013, Chinese banks had achieved the some of the highest provisioning and capital ratios in the world (IMF Country Report - China, 21). 4.5. Intellectual property protection Intellectual property protection in the United States The United States has one of the strongest legislation in protecting intellectual property. Strong legal background has made the United States the world’s largest single market for protected goods (Selectusa.commerce.gov, n.p.). Thus, having created the “world’s leading intellectual property rights regime”, the United States government made its environment more attractive for innovative businesses and projects. Intellectual property protection in China China has become a member of a World Trade Organization in 2001, and thus has reinforced some IP protection in the country’s national laws (Intellectual Property Rights In China, 3). Thus, WTO membership has enforced Chinese government to adapt its local IP laws to the minimal international standards. In addition to this, China is a signatory to the following agreements of Intellectual property: The Paris Convention, the Barne Convention, the Madrid Protocol, and the Patent Cooperation Treaty (Intellectual Property Rights In China, 4). However, despite the number of Intellectual Property Protection laws introduced by the Chinese government, Chinese economic growth and expansion has created some problems related to such illegal activities as counterfeiting (Intellectual Property Rights In China, 7). 5. Discussion of Findings (Research) China plays an important role in the United States international economy as it is one of the most important trading partner after Canada (JPMorgan, 1). However, as it has been illustrated in the previous section, there are massive imbalances in the USA and China trade activity. Partially, this imbalance between the economic relationship of the USA and China is explained by the activity of the China Investment Corporation’s activity (Clark and Monk, 101). Thompson (349) explains that fiscal and monetary policies of the USA were not efficient enough, whereas monetary expansion caused the dollar depreciation and therefore contributed to the trade deficit. However, the purpose of this paper is not aimed at analyzing the reasons of the US trade deficit but at understanding of the impact of this deficit on the US economy. Labor Costs in the United States show continuously increasing tendency during a long period of time and the forecast is that this increase will continue in the future (Tradeeconomics.com, n.p.). Labor Costs in China, on the contrary to the USA show continuously decreasing tendency. While there are some sources that forecast continuance of this tendency, the IMF experts forecast that by 2025 labor costs in China will rise as a result labor shortages (aging and declining fertility resulting in smaller working age population) (Das and N’Diaye, 35). In case the rise of labor costs will occur, this will have considerable implications for trade, price and employment developments in key trading partners, including the USA. Rising labor costs in China would affect prices, corporate profits and incomes in China and therefore, for the USA manufacturers it might be less profitable to outsource production facilities to China (Das and N’Diaye, 34). This change could have significant impact on the USA economy, as a result of encouraging local manufacturers to produce goods at home, and raising domestic employment (Das and N’Diaye, 34). However, the rise of the labor cost in China is still questionable and can be delayed by the government policies such as encouraging movement of rural population to the cities, the technological mist of industry, income distribution, etc. (Das and N’Diaye, 36). Government regulation and support of business in China is much weaker than it is the USA. While the United States are viewed as excessively regulated market there are some obvious benefits. Chinese government is on its way of adjusting its regulatory field in accordance with market and economic needs and it is quite successful in terms of some economic measures. Taking into consideration the fact that the United States and China are major trade partners to each other, government regulation and support towards both local and international businesses can have significant impact on both. Growing popularity of RMB as an international currency is more likely to create more demand for RMB-denominated assets, and offshore RMB accounts (JP Morgan 1). For making Chinese financial system more commercially oriented, implementation of the following policies are required: liberalization of interest rates; strengthening of regulatory and supervisory oversight in trusts, and WMP; institutional setting, using interest rates as the primary tool of monetary policy (IMF Country Report - China, 23-24). Intellectual property assets play more and more important role in the success in a global economy (Selectusa.commerce.gov, n.p.). Thus, for example, in 2005 the intellectual property including patents granted, R&D expenditures, and researches in R&D contributed 43,2% to Index (Agarwal et al, 195). As it has been stated previously, the United States has one of the strongest legislation in protecting intellectual property and thus, the country attracts the largest number of entrepreneurs and businesses with IP products. If the Chinese economy will become the largest economy in the world it will have some effect on business practice in the US as various forms of IP infringement common for the Chinese market might have significant negative impact on the US economic development (Intellectual Property Rights In China, 7). Conclusion and Recommendations The Chinese economy will soon be largest economy in the world, replacing the USA on the second place. Assuming that the forecast that the Chinese economy will overcome the American economy soon, there were tested two hypotheses: that the Chinese economy becoming the largest economy in the world will have no effect on business practice and government regulation in the US and that it will affect business practice and government in the US. The analysis of some critical economic and regulatory factors (trade activity, labor costs, government regulation and support, intellectual property, fiscal and monetary policies) has shown that the Chinese economy becoming the largest economy in the world will definitely affect business practice and government in the US. Both countries are strategic partners to each other and trade between both will have its impact. China, becoming a world leader will more probably change its focus from major exporting country to investing country, buying out the majority share package of large corporations. This will definitely have significant impact on the US business practice. In order to lower the risks, the US government has to focus its strategy on lowering the trade deficit of the country. The American businesses will feel on their skin the lack of Intellectual Property rights in China and government should prevent this by imposing some tariffs (Walsh n.p.). Works Cited Agarwal, M. China, India And The US: Shifting Economic Power. China Report 47.3 (2011): 179-200. Web. 3 Jun. 2014. Buckley, R. (2014). The Rise of China and Its Impact on International Economic Governance. International Relations And Security Network. Retrieved 3 June 2014, from http://www.isn.ethz.ch/Digital-Library/Articles/Detail/?id=177478 Clark, Gordon L., and Ashby H. B. Monk. "The Political Economy Of US-China Trade And Investment: The Role Of The China Investment Corporation." Competition And Change 15.2 (2011): 97-115. EconLit with Full Text. Web. 3 June 2014. Das, M, and P N’Diaye. The End Of Cheap Labor. 1st ed. IMF, 2013. Print. http://www.imf.org/external/pubs/ft/fandd/2013/06/pdf/das.pdf Davis, Marc. Government Regulations: Do They Help Businesses?. Investopedia. N. p., 2011. Web. 11 Jun. 2014. IMF, International Financial Statistics,. China, P.R.: Mainland: Economic Indicators. N. p., 2014. Web. 3 Jun. 2014. IMF, International Financial Statistics,. United States: Economic Indicators. N. p., 2014. Web. 3 Jun. 2014. IMF Country Report No. 13/236. The United States. 1st ed. Washington, D.C.: IMF, 2013. http://www.imf.org/external/pubs/ft/scr/2013/cr13236.pdf IMF Country Report No. 13/211 PEOPLES REPUBLIC OF CHINA1st ed. Washington, D.C.: IMF, 2013. Web. 3 Jun. 2014. Retrieved from http://www.imf.org/external/pubs/ft/scr/2013/cr13211.pdf Intellectual Property Rights In China. 1st ed. Newport: Intellectual Property Office, 2013. Web. 3 Jun. 2014. JP Morgan. China’s economic and political trends and their impact on the U.S., Dec.2012. Retrieved from https://www.jpmorgan.com/tss/DocumentForEmail/China_Economic_Trends/1320515371764 Selectusa.commerce.gov,. Intellectual Property (IP) Protection | Selectusa. Web. 3 Jun. 2014. Retrieved from http://selectusa.commerce.gov/intellectual-property-ip-protection Thompson, Henry. "Weak Policy In An Open Economy: The US With A Floating Exchange Rate, 1974-2009." Economic Analysis And Policy 42.3 (2012): 339-350. EconLit with Full Text. Web. 3 June 2014. Tradingeconomics.com,. China Labour Costs | Actual Value | Historical Data | Forecast. N. p., 2014. Web. 3 Jun. 2014. Tradingeconomics.com,. United States Labour Costs | Actual Data | Forecasts | Calendar. N..p., 2014. Web. 3 Jun. 2014. US Commercial Service, 2012 Country Commercial Guide For U.S. Companies. 2012. Doing Business In China, p.1-2. Available at: http://www.google.com.ua/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CBsQFjAA&url=http%3A%2F%2Fexport.gov%2Fchina%2Fbuild%2Fgroups%2Fpublic%2F%40eg_cn%2Fdocuments%2Fwebcontent%2Feg_cn_025684.pdf&ei=eImYU9HfBMPNygPo_YGoDg&usg=AFQjCNGZh7IHwVodEAIEqXVVEHepWLZjMQ&sig2=li0Ux3Xm4M8nBSwM1Hzb7Q&bvm=bv.68693194,d.bGQ Walsh, B. Solar Eclipsed. TIME.com. N. p., 2012. Web. 11 Jun. 2014. Available at: http://content.time.com/time/magazine/article/0,9171,2106985,00.html?iid=pw-biz Read More