Dose Trade with Low-Wage Countries Cause a trade Deficit in the High-Wage Country - Assignment Example

Trade imbalances The term trade imbalance refers to the trade deficit and the large trade surpluses in China and other countries from whom it imports from. According to the U.S census bureau, the U.S trade deficit increased from $500 billion in 2010 to $558 billion in 2011. Two-third of the growth of the trade deficit was as a result of increased importation of crude oil and refined petroleum products. Us trade deficit with China in 2010 was $273.1 billion. The Business and Industry Council’s interest in discouraging imports is for the best interest of American citizens.

This is because; absorption of U.S domestic demand for goods by exporters in china and oil exporting countries has widely suppressed domestic job creation in the U.S. In 2011 and 2010, the increasing U.S trade deficit with China led to 2.8 million jobs displacement in U.S (Bordon, 2011). Other factors that have led to the shrinking of the manufacturing sector include rising technological changes which have increased labor productivity, forcing firms to hire few workers. It is incorrect for the Business and Industry Council to blame imports alone for the international imbalance that have led to manufacturing crisis.

Manufacturing crisis refers to the long-run trend of falling employment in the manufacturing sector in the United States. The macroeconomic policies that China has adopted of currency devaluation, increasing U.S dollar holding and, subsidies advancement to a range of industries are the major cause of the high trade deficit. By 2011, China had accumulated $3.26 trillion in foreign reserves in U.S treasuries. In Chinese auto-parts industry, both domestic and foreign owned plants have received $27.

5 billion in government subsidies. In 2006, 58.2 per cent of China’s exports were from the foreign firms operating in China. These firms are taking advantages of the subsidy policy and availability of cheap labor in China. China and other low wage rate countries enjoy availability of cheap labor, relative to their counterparts in the US and other developed countries. This is the area where they have a comparative advantage in manufacturing.Undervaluing the Chinese currency, yuan, has expanded the U.

S trade deficit hurting the U.S manufacturing and depressing the U.S employment. According to the congress research service report (2008), China’s foreign exchange rates reserves increased from $403 billion to $1.5 trillion between 2003 and 2007.in 2010 the reserves were $3.2 trillion. Lutes argue that, lax U.S financial regulations that have fueled over borrowing and overconsumption of Chinese products are the major policies encouraging the increasing trade deficit. Not all high wage countries that trade with China have a trade deficit.

Netherlands and Germany are among the high wage nations that trade with China and yet they are enjoying trade surplus. In conclusion, Business and Industry Council allegation that the international imbalances are caused by excessive imports, which, in turn, are fueled by low wages in other countries, is not in itself entirely true. As explained above, there are many factors that cause international imbalances.Work citedLutes, John. Balance of payment and economic growth: New York: Herper and Brothers, 1959.

PrintBordo, Mecher. (2003).Exchange Rate Regimes, and Globalization: Chicago: University of Chicago, 2003. Print.