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Determining Causes and Effects - Essay Example

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Running Head: Causes and Effects Causes and Effects Causes and Effects For the past decade, the economic structure of the U.S. has changed dramatically. Labor costs have gone up, and because of inflation overheads and other expenses, the cost of production has increased significantly as well…
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Determining Causes and Effects

Download file to see previous pages... Every since 2000, incidentally when China joined the WTO, the U.S. has been hit by manipulative Chinese policies which means that Chinese exports of auto parts have increased 900 percent and the U.S. is a major importer of these parts (See figure 1). The reason American automobile industries rely so heavily on the Chinese auto parts market is because the Chinese ones are much cheaper, plain and simple, a feat achieved by the Chinese central and local governments heavily subsidizing its industries for the past decade. These subsidies are direct and indirect such as low-cost or free land and infrastructure, below-cost industrial inputs such as steel and glass, and electricity provided at less than the cost of generation. Despite the fact that these subsidies have been declared illegal by the WTO (Anderson, 2012), China’s auto parts industry and consequently its balance of payments continue to thrive at the expense of the honest practice of their American counterparts. Another important factor in Chinese products appearing cheaper than American ones is that China is notorious for employing the most staunch currency manipulation policies so that its exports remain competitively prices as compared to American and European counterparts. This means that China artificially gives its currency a lower face value so that when converted they appear to be lower in terms of American dollars (or any other currency for that matter) and so their goods seem more appealing to the public. In fact, the disparity achieved by the artificially valued Renminbi is believed to be as much as 25 – 30%. That means Chinese exports appear 25 - 30% cheaper than they would have been otherwise in the global markets if these currency manipulations were not in place. Thus, many American businesses and industries rely on China (instead of their own local) auto parts industries. Figure 1 One other aspect involved in this tilting of the balance towards China is the fact that in China the industries receive great support from many estates of the country. That is to say, in the auto industry, rare earth elements and provided to Chinese exporters and low cost and also, capital cost is also kept artificially low as investors and exporters are allowed to borrow from government-owned banks on sub-market rates, sometimes even given a waiver on their loans. Thus, their production cost is greatly reduced making them competitive in the foreign market. But China is not the only party to blame in this auto parts fiasco, a great part of the burden also goes on the American industries that instead of condemning, actively encourage and endorse the Chinese’ disregard of fair trade practices by purchasing Chinese imports. America and China are not the only countries with giant automobile industries; Germany, Japan, and South Korea also operate in this manufacturing niche. Seeing as Chinese manipulation and policies affect America so, it can be assumed that the other three countries and their balance of payments should be affected similarly, but that is not the case. In fact, Germany, Japan, and South Korea have trade surpluses with China as opposed to the heavy deficit that America has. This is because their governments have imposed laws and not operated on a completely blind free-trade practice with China, something America can take ...Download file to see next pagesRead More
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