China's Economic Growth and Its Impact on the U.S. Economy - Research Paper Example

China's Economic Growth and Its Impact on the U.S. Economy History of China’s economy The current economic miracle in China can be traced to the second half of the 20th century, specifically the late 1970s. In 1978, under Deng Xiaoping, China began marking the beginning of economic transformations. The government lessened its role in the economy by introducing economic reforms which were elements of a free-market economy and encouraged foreign investment. This ended the monopolisation of foreign trade by the government where the government set prices for goods, controlled the general distribution and level of investment funds, set employment targets and wage levels, determined output targets for key enterprises and branches, operated the retail and wholesale networks and allocated energy resources. Almost all enterprises were state-owned. Under the new economic reforms, economic sectors were supervised by economic institutions like people’s bank of China, and government ministries that were responsible for each of the sectors (EconomyWatch 2010). These reforms laid the groundwork for the economy of the present day China (CBC News 2006). Since the 1970s reforms, China has been seeking to decentralize its system of foreign trade to integrate itself into the system of international trading. On November 1991, China became part of the Asia-Pacific Economic Cooperation (APEC), an economic group which promotes free trade among member states and cooperation the in technology, economic, investment and trade spheres. This boosted its economic growth through trade. Admission into the World Trade Organization (WTO) in late 2001 has also accelerated China’s economic growth. It has increase its merchandise trade leading to tremendous growth in its exports. Estimates from the World Bank indicate that international trade makes up a significant portion of China's overall economy and exports represent 25% of China's GDP (CBN News 2006). Through these reforms, China has transformed from an economy that was excessively centrally planned and, matured to a more open economy and into becoming the growth engine for the global economy for the past one decade. Currently, China is the second largest economy globally after the US and is the fastest-growing major economy globally. The country’s inflation rates have stabilized successful after reaching high of about 7% in 2004 (EconomyWatch 2010). In 2010, China recorded an unemployment rate of only 4.1% decreasing 4.655 from 2009. Forecasts for 2015 predict that this rate will be maintained at 4% between 2011 and 2015. Driven by rising incomes and rapid economic growth, the standard of living in China has risen. Consumer spending has increased. The economic transformation has led to increase in wages but these figures remain much below those of other industrialized world. This has had the advantage of keeping the country’s goods competitively priced and for it to make major inroads into global markets where they used to be bit players. The major drivers of China’s economy are agriculture, industry and manufacturing mainly steel and automotive, energy and mineral resources, services like tourism, export trade, foreign investment, mergers and acquisitions and luxury goods. There is a good development of transport and infrastructure, science and technology and, communications to facilitate this. China has also thrived well by re-engineering products. The country is increasingly targeting old or indigenous innovation and reforming their remaining weaknesses to come up with more advance and competitive products. Export / Import Economic data for 2006-2010 reveals that China has maintained a GDP growth rate of 10% annually. In 2010, its GDP growth rate was 10.456%, an equivalent of US$ 5,745.13 billion and in 2011, this was $8,398 billion, almost $2 billion higher than the forecasted US$ 6,422.28 billion/ 11.79%. Forecast for 2015 is US$ 9,982.08 billion indicating an expected GDP growth rate of 10-12% annually between 2010 and 2015 (EconomyWatch, 2010 and China.usc.edu, 2012). This growth in the country’s GNI, GDP and per capita GNI can also be linked to remittances from Chinese workers abroad. Currently, the country is the leading exporter and the 2nd largest importer globally. China’s trade with developing countries has greatly reduced to become negligible. Its primary trading partners are the US and Japan. Other major trading partners are Honk Kong, South Korea, Russia, Taiwan, Germany, Australia, Malaysia, Brazil and India in that order. A large percentage of China's imports consist of capital goods and industrial supplies, mainly high-technology equipment and machinery. The majority of these imports come from developed countries, chiefly Japan and the US. Concerning regional trade, almost 50% of China's imports come from countries in the East and Southeast Asia and approximately 25% of its exports go to these countries (China.usc.edu, 2012). Approximately 80% of China's exports are manufactured goods, most of which are electronic equipment and textiles. Chemicals and agricultural products constitute the remaining percentage. Russia is one of China’s major trading partners. China’s exports to Russia are mostly apparel, footwear, machine, electronic goods and high-tech products. China in turn imports energy sources like crude oil from Russia. Currently, China is Russia's 4th largest trade partner while Russia is China's 8th largest trade partner. In 2007, China was India’s leading trading partner. China’s trade with the US is worth noting. The US is China’s leading trading partner and in 2010, its trade volume with the US amounted to $385.3 billion. On the other hand, China is the second largest trading partner of the US and in 2011, this trade volume with China amounted to $597.4 billion. The US is China’s leading export destination. Its major exports to the US are electrical machinery and equipment, power generation equipment, apparel, iron and steel, optics and medical equipment, furniture, inorganic and organic chemicals, ships and boats, vehicles, excluding rail and footwear in that order. In terms of imports, the US is the 4th largest source of China’s imports. These imports include electrical machinery and equipment, mineral fuel and oil, power generation equipment, ores, slag and ash, optics and medical equipment, plastics and articles thereof, inorganic and organic chemicals, vehicles, excluding rail, copper and articles thereof and iron and steel in that order (US-China Business Council, 2012). Despite the seemingly free trade between the two countries, exporters in the US continue to raise concerns regarding fair market access because of the U.S. export restrictions and China's restrictive trade policies. Impact on U.S. Economy Trade between China and the US has presented a number of advantages and potential opportunities for the US economy. These include growth in the US GDP and reduced prices of commodities due to investment in China, improved output per worker due to improvements in manufacturing productivity, improved income per household and increased output from US firms to compete with Chinese firms. Despite these advantages, trade with China presents some disadvantages to the US which requires a lot of considerations to ensure that the US does not toil endlessly just to benefit the Chinese economy. One of them is China's 24% tariff on imports which makes the US not to gain fully from exporting to China. Another disadvantage is the US $6 trillion external debt that evidently resulted from trading with China. The third disadvantage in the trade between the US and China results from China’s currency manipulation. Yadavalli (2007) states that each year, China suppresses the value of its Yuan. This manipulation is on a massive scale and some estimates indicate that the Chinese Yuan is undervalued by up to 40% compared to the US dollar. By exploiting the global currency markets, China can manage to spend 9% of its total GDP to subsidize its exports. This gives its exports a competitive edge over the highly priced US goods. This currency manipulation has contributed to the dramatic rise in the bilateral trade deficit US is experiencing in its trade with China. By 2010, this figure was $295 billion annually. However, it is difficult to exclusively link the bilateral trade imbalance between China and the US to the recent meltdown of the overall US trading position. China is also using currency manipulation to improve its GDP for example, by attracting investments to China. This manipulation has also led to differences in labour costs where the Chinese labour market seems to be cheaper. This situation has attracted manufacturing facilities away from America, both American and non-American. In relation to this, the US trade and investment in China has helped to boost China’s GDP but to its disadvantage, it has shifted the structure of the US employment from manufacturing and industry towards services. This has displaced workers in the manufacturing sector and in 2010, this reduction was approximately 500,000. A huge competitive advantage in terms of low production costs and cheap labour gives Chinese goods an edge over US firms. This threatens to force US firms either to reduce their prices and increase production or close. The flourishing Chinese economy gives a picture of its high GDP. However, this GDP is lower compared to its high population and because of this, China is still relatively a poor country. According to Amadeo (2010), China’s economy produces only $7,600 GDP per person compared to the US $47,000 GDP per capita. The economic transformations experienced since 1978 have therefore benefited millions among the Chinese population but hundreds of millions have not experienced these benefits. They are facing poor living conditions. As seen from the above discussion, these low standards of living enable China to pay low wages to its workers and cut its general production costs thus luring overseas manufacturers to China to outsource their jobs. Conclusion: Future Outlook for China, 10 years from now. The great outsourcing by US manufacturing companies over concerns of wages and productions costs has made the service industry the only most viable economic option for mitigating the increased unemployment rates resulting from outsourcing. By becoming a service oriented economy, the US has managed to secure higher paying jobs for its highly skilled and expensive workforce. They have become more dependent on jobs like education, music, food services, personal services, hospitality business among others. Boeing for example develops its designs in the US and calls for bids from other countries. Apart from manufacturing, the company has majored in services related to commercial, passenger and military aircrafts. This is done by the company’s defence, space and security segment. If US firms will choose not to outsource to China but manufacture their products in the US, the US economy will be boosted. The country will no longer be too service oriented which in turn forces the country to become over-dependent on imports from China and other countries. Instead, the country will have plenty of goods to export to its trading partners and other new markets and its GDP will generally go up Employment rates will increase as people who had been displaced from their jobs by outsourcing and maybe they had not found a stable employment in the service industry will resume work. This will reduce national debt and, mortgages and credit lines among the citizens. Even with this option, the US should uphold its service industry as a tool for economic risk management. Reeher (2012) explains that the service industry does not contract during economic recession compared to manufacturing industry. While the US will benefit from such a step, China will definitely be at the losing end. Earlier on, it was indicated that the US is the leading export destinations for China and such a shift will therefore significantly reduce closing China’s biggest export market. Given a period of 10 years, this change can cut China’s exports to the US by over 50%. The country will therefore be forced to seek alternative markets for its products among developing countries or bear with the revenue deficit created by the change. With such kind of a change, the US will be free and open to do business with other emerging markets like Brazil, India, Thailand since there is nothing that binds it to China. These economies provide a greater potential for profit compared to China that imposes use tariffs on US exports and this is a good insurance just in case China hits back by not importing from the US. In all dimensions, the change will negatively affect the economy of China for at least for the next one or two decades before it establishes other markets. However, this effect could be very long lasting as it will be difficult for China to find a single market or combination of few markets for its products that is as powerful as the US. References Amadeo, K. (2012). China's Economy: China's Economy Is Strong. Retrieved from http://useconomy.about.com/od/worldeconomy/p/China_Economy.htm CBC News (2006). China's economic miracle: the high price of progress. Retrieved from http://www.cbc.ca/news/background/China/ China.usc.edu (2012). "2011 USC US-China Institute conference on the State of the Chinese Economy, complete schedule and presentations". Retrieved from http://China.usc.edu/ShowArticle.aspx?articleID=2401EconomyWatch (2010). The Chinese Economy. Retrieved from http://www.economywatch.com/world_economy/China/?page=full Reeher, J. (2012). Service Industry Vs. Manufacturing Industry. Retrieved from http://politics.lilithezine.com/American-Economy-Collapsing.htmlUS-China Business Council. (2012). US-China Trade Statistics and China's World Trade Statistics. Retrieved from https://www.usChina.org/statistics/tradetable.html Yadavalli, A. (2007). Trade with China Fraught with Disadvantages, Economist Says. Retrieved from http://www.cnbc.com/id/19029280/Trade_with_China_Fraught_with_Disadvantages_Economist_Says Read More