The Global Economy and Progressive Embrace of Market Principles - Essay Example

Order 218689 US Trade Relations With China Thirty years ago, China was a nation mostly closed to international commerce. Today, it is the world'sthird largest trading power. China's emergence over this period as a major international player has not only redefined the global trading system, but also has far-reaching economic and political impact on China, the United States, East Asia and the world. China's integration into the global economy and progressive embrace of market principles have been encouraged by more than 25 years of U.S. political and economic engagement, pursued on a largely bipartisan basis across administrations. These developments have helped broaden and deepen relationships between the United States and China at all levels, to the benefit of both countries. But they have also caused some friction. The trade relationship between US and China has become increasingly central to the economies of both countries. China's economy has been growing at roughly ten percent a year for more than two decades, and its growth has been closely tied to the open trade and investment regimes of the major economies of the world. Exports account for 40 percent of China's gross domestic product (GDP), and China has depended on the growth of its export sector to spur modernization of its economy and support improved standards of living. The World Bank estimates that during the past two decades (1980s and 1990s), nearly 400 million people in China have been lifted out of poverty. According to Chinese data, the United States market has directly accounted for 22 percent of China's phenomenal export growth over the last twenty years. The enormous scope and scale of the changes that have occurred in China's trading posture and in our bilateral trade relationship pose continual challenges. In particular, there is concern that the U.S.-China trade relationship lacks balance in opportunity, as well as equity and durability, with China's focus on export growth and developing domestic industries not being matched by a comparable focus on fulfilling market opening commitments and on the protection of intellectual property and internationally recognized labor rights. http://www.ustr.gov/assets/Document_Library/Reports_Publications/2006/asset_upload_file921_8938.pdf U.S.-China Trade U.S. policy is to further open China's markets to U.S. firms, and to encourage China to correct imbalances within its system. The U.S. supported China's WTO membership as a big step toward eliminating market barriers to U.S. companies. The U.S. continues to work with China's leaders and reformers to achieve full and effective compliance with China's WTO commitments in order to increase U.S. exports to the PRC. Ever since Deng Xiaoping ushered in a wave of liberalization in the late 1970s, the world has witnessed a surge in Chinese economic power. Over the last quarter century, China has averaged 9.5 percent growth annually, more than quadrupled its gross domestic product (GDP), and lifted over 400 million of its citizens out of poverty. In 1977, China had the thirtieth-ranked trade volume in the world; in ten years it is projected to be the world's top trading nation; and in fifteen, it will likely have the world's largest GDP. This rapid rise was aided by the normal trade relations China established with the United States in 1979, and later by China's accession into the World Trade Organization (WTO) in 2001. But U.S.-Chinese trade relations have always been somewhat uneasy; for many years, Congress used an annual review of China's "Most Favored Nation" trading status to link trade liberalization with Beijing's human rights record. More recently, U.S. leaders have begun to worry about a massive trade imbalance that continues to grow. Protectionists in Washington and Beijing have begun to dig in their heels against the powerful economic forces that are changing their nations, while U.S. calls for China to revalue its currency and crack down on counterfeiting have not made much headway. Trade Volume A major factor in China's quick rise has been its vigorous trade activity with the United States. Trade volume between the two nations reached $211.6 billion in 2005, more than eighty times the $2.4 billion exchanged in 1979, the year they established normal trade relations. This has accelerated in recent years; from 2001 to 2005, the volume of U.S.-Chinese trade increased an average of 27.4 percent a year. The United States has become the top destination of Chinese merchandise exports and China is buying up more and more U.S. goods, with U.S. exports to China rising 21.5 percent each of the last four years. Trade Imbalance In 2005 the United States ran a bilateral trade deficit with China of $202 billion, up from $162 billion the previous year. Senator Charles Schumer (D-NY) said in a statement to press that these figures should be "a red flag to the Congress and to the global economy." Many Americans worry the United States is too dependent upon China for its imports, and blame the deficit for the loss of U.S. manufacturing jobs. Despite public fervor, the trade deficit does not have all economists worried. "I personally don't believe the bilateral trade deficit is dangerous for the United States," says Benn Steil, a CFR senior fellow and director of international economics. This is partly because, while China has a massive trade surplus with the United States, its overall trade surplus is not excessively large. Furthermore, the bilateral deficit doesn't take into account products manufactured in China by U.S. and other foreign companies. CFR Senior Fellow Adam Segal says some of the increase in the trade deficit is because "China has replaced all the Asian producers the United States used to import from." Growing protectionist elements within the United States and China have at times opposed trade agreements between the two nations. In the United States showdowns with Chinese investors have been focused mainly on security and based in part on what Segal describes as "a general distrust of China." In August 2005, congressional uproar over energy security caused the Chinese energy company CNOOC to withdraw a bid to buy the U.S. oil company Unocal. In 1999, as the Hong Kong shipping company Hutchinson Whampoa was about to take control of the shipyards lining the Panama Canal, retired U.S. admiral and former Chairman of the Joint Chiefs of Staff Thomas H. Moorer predicted a "nuclear Pearl Harbor." That deal, however, went through. Security concerns are also at the root of a U.S. ban on trading military or dual-use technologies with China. Intellectual property rights (IPR) are another source of tension in U.S.-Chinese trade relations. Reports of IPR violations extend well beyond the somewhat familiar software and DVD pirating to include potentially more harmful counterfeits, including pharmaceuticals, automobiles, and even airplane parts. For its part, the Chinese government has imposed anti-counterfeiting laws and established special courts to prosecute offenders, but so far this has had little effect. As Economy explains, "There's very little incentive for local officials to crack down," especially when counterfeits provide locals with jobs and likely fill officials' wallets with kickbacks. There is some hope that as Chinese innovation creates new products, it will become more rigid in its enforcement of IPR laws. Segal is not optimistic. He says that in China "there is a lot of pressure to reverse engineer*, which would create more IPR issues." The United States has threatened to bring the dispute up before the WTO, though it's not a very palatable option, as China might actually come out on top in arbitration. Segal says that in terms of pressuring China on IPR violations, "We really don't have a lot of tools." ('http://www.cfr.org/publication/10482/uneasy_uschinese_trade_relationship.html) ' Today the US and China are probably the world's two largest economies Relations between these two countries are crucial to the future development of the world economy. Unfortunately economic relations between the two countries are troubled. China is large, rapidly growing, and still in the process of devising and implementing fundamental economic reforms. Despite its size and importance to the global economy, it is still not a member of the World Trade Organization (WTO), the primary multilateral institution for managing the world trade system. As a consequence, trade disputes between China and the US are resolved almost exclusively in public, acrimonious bilateral negotiations. This pattern exposes both the strengths and the weaknesses of the US position. By pressing China bilaterally, and using the leverage of access to its large and lucrative market, the US can largely set the agenda without concern for third party interests. At the same time, US trade policymaking is a complainant driven system prone to capture by special interests. Consequently the US can set the agenda, but the agenda may reflect the very particularistic demands of narrow groups and detract from the achievement of broader aims. US-China economic relations reaches a number of major conclusions: China's large bilateral surplus acts as a political lightning rod in the US and contributes to trade tensions, regardless of the economic merits of these political concerns, The impact of the rapid growth of bilateral trade on the US economy is positive, though probably not particularly large: imports from China have largely displaced imports from third countries, not domestic production, and exports have been higher than expected as well, In the recent dispute over intellectual property rights (IPR) the industry loss claims appear greatly exaggerated, Though self-inflicted export disincentives probably do more to discourage US exports than Chinese policies do. Several recommendations for US policy: The US needs to get its own house in order, reducing its budget deficit (so as to reduce the trade deficit), and reform both disincentives to export, and the way in which the trade policy agenda is set, The annual debate over most favored nation (MFN) status is counterproductive and the Jackson-Vanik amendment should either be repealed or circumvented, And given the uncertainty surrounding the future Chinese regime, the US government should consider cultivating contacts outside the central government. ('http://www.petersoninstitute.org/publications/wp/wp.cfm'ResearchID=162) Trade Relation Does Not Help Americans The rise in the United States' trade deficit with China between 1989 and 2003 caused the displacement of production that supported 1.5 million U.S. jobs. Some of those jobs were related to production or services that ceased or moved elsewhere; others are jobs in supplying industries. These jobs reflect the effect on labor demand - in lost job opportunities - in an economy with a worsening balance between exports and imports. Most of those lost opportunities1 were in the high-wage and job-hemorrhaging manufacturing sector. The number of job opportunities lost each year grew rapidly during the 1990s, and accelerated after China entered the World Trade Organization (WTO) in 2001. The loss of these potential jobs is just the most visible tip of China's impact on the U.S. economy. - The loss of job-supporting production due to growing trade deficits with China has more than doubled since it entered the WTO in 2001. The 1.5 million job opportunities lost nationwide are distributed among all 50 states and the District of Columbia, with the biggest losers,in numeric terms: California (-199,922), Texas (-99,420), New York (-81,721), Pennsylvania (-69,822), Illinois (-69,668), North Carolina (-62,698), Florida (-60,026),Ohio (-58,094), Michigan (-50,991), and Georgia (-46,848). - The 10 hardest-hit states, as a share of total state employment, are: Maine (-14,951, or -2.47%), Arkansas (-19,123, -1.67%), North Carolina (-62,698, -1.65%), Rhode Island (-7,548, -1.56%), New Hampshire (-9,443, -1.53%), Indiana (-43,533, -1.50%), Massachusetts (-46,463, -1.46%), Wisconsin (-39,668, -1.43%), Vermont (-4,211, -1.41%), and California (-199,922, -1.39%). - China's exports to the United States of electronics, computers, and communications equipment, along with other products that use more highly skilled labor and advanced technologies, aregrowing much faster than its exports of low-value, labor-intensive items such as apparel, shoes,and plastic products. - Consequently, China now accounts for the entire $32 billion U.S. trade deficit in Advanced Technology Products (ATP). - China is also rapidly gaining advantage in more advanced industries such as autos and aerospace products. China's entry into the WTO was supposed to provide openings for sufficiently rapid growth in U.S. exports to reduce the trade deficit with China. While the export growth rate has increased since 2001(from a very small base), the value of those exports has been swamped by a rapidly rising tide of imports. The WTO is a free trade and investment agreement that has provided investors with a unique set of guarantees designed to stimulate foreign direct investment and the movement of factories around the world, especially from the United States to low-wage locations such as China and Mexico (Scott 2003). Furthermore, no protections were contained in the core of the agreement to maintain labor or environmental standards. China's refusal to revalue its exchange rate, despite enormous demand for its currency, is also a major contributor to the growth of the U.S. trade deficit. Thus, the WTO and the broader process of globalization have tilted the economic playing field in favor of investors, and against The employment effects of trade with China The distribution of job losses between 1989 and 1997 closely follows changes in trade patterns. The largest losses of job-supporting production in this period occurred in leather products (-66,000 job opportunities) apparel (-55,000 jobs), rubber and plastics (-38,000 jobs), furniture (-15,000 jobs), and electronic machinery (-69,000 jobs) - which included audio/video equipment (-18,500 jobs) and communications equipment (-3,700 jobs). The textile industry also experienced a major indirect effect, as it suffered a loss of output that would have supported 24,000 jobs, due to the growth of apparel imports. Note that during this period the apparel deficit was more than 14 times as large as the deficit in textiles, yet both industries suffered a similar amount of employment displacement. (http://www.epi.org/workingpapers/epi_wp270.pdf) US JAPAN TRADE RELATIONS Japan and the United States are the two largest economic powers. Together they account for over 40% of world domestic product, for a significant portion of international trade in goods and services, and for a major portion of international investment. This economic clout makes the United States and Japan powerful actors in the world economy. Economic conditions in the United States and Japan have a significant impact on the rest of the world. Furthermore, the U.S.-Japan bilateral economic relationship can influence economic conditions in other countries. The U.S.-Japan economic relationship is very strong and mutually advantageous. The two economies are highly integrated via trade in goods and services - they are large markets for each other's exports and important sources of imports. More importantly, Japan and the United States are closely connected via capital flows. Japan is the largest foreign source of financing of the U.S. national debt and will likely remain so for the foreseeable future, as the mounting U.S. debt needs to be financed and the stock of U.S. domestic savings remains insufficient to meet the demand. Japan is also a significant source of foreign private portfolio and direct investment in the United States, and the United States is the origin of much of the foreign investment in Japan. The relative significance of Japan and the United States as each other's economic partner has diminished somewhat with the rise of China as an economic power, and with U.S. economic ties with Canada and Mexico deepening as a result of the North American Free Trade Agreement (NAFTA). Nevertheless, analyses of trade and other economic data suggest that the bilateral relationship remains important, and policy leaders of both countries face the challenge of how to manage it. During the last decade policy leaders seem to have made a deliberate effort to drastically reduce the friction that prevailed in the economic relationship. On the one hand, this calmer environment has stabilized the bilateral relationship and permitted the two countries to focus their attention on other issues of mutual interest, such as national security. On the other hand, as some have argued, the friendlier environment masks serious problems that require more attention, such as continuing Japanese failure to resolve long-standing market access barriers to U.S. exports of autos and auto parts and flat glass and the failure of the two countries to reduce bilateral trade imbalances. Failure to resolve any of these outstanding issues could cause heightened friction between the two countries. Issues regarding U.S.-Japan economic relations may emerge on the agenda of the 110th Congress. U.S. and Japanese leaders have several options on how to manage their relationship including stronger reliance on the World Trade Organization; special bilateral negotiating frameworks and agreements; or a free trade agreement. U.S.-Japanese Trade in Goods and Services U.S.-Japanese bilateral trade in goods and services has grown over time, although recently the level of bilateral trade turnover has plateaued. U.S.-Japan total trade in goods attained a record level in 2000. U.S. exports to Japan dropped about 21% from $64.9 billion in 2000 to $51.4 billion in 2002, but have been increasing since then. U.S. imports have increased recently from $118.0 billion in 2003 to $148.2 billion in 2005. U.S. imports from Japan are concentrated within three main categories. About 75% of those imports in 2006 consisted of passenger cars and parts; computers and components; office machinery parts; and electrical machinery (primarily video cameras). U.S. exports to Japan are much more diverse, but a major portion of those exports are in computers and components; gas turbines (turbojets, turbo-propellers, etc); office machinery parts; electrical machinery (integrated circuits and electrical apparatus for line telephone systems); optical and medical equipment; and agricultural products such as wheat and meat. In 2006, the United States accounted for 11.8% of Japanese imports. The United States has been and remains Japan's most important export market having accounted for 22.5% of Japanese exports in 2006 The relative shares and rankings of countries in export and import markets of trading partners have little significance in economic terms but often influence the shape and management of trade policies. The emergence of China and other East Asian countries has played a role in the declining significance of the United States in Japan's trade. In the last decade, Japanese trade flows have shifted decidedly towards East Asia from the United States. In 1994, 38.6% of Japanese exports went to and 33.0% of Japanese imports came from 9 of the largest economies in East Asia.2 By 2006, 45.6% of Japanese exports and 41.4% of Japanese imports were with the 9 countries of East Asia. China is the fastest growing Japanese trade partner. Similarly, the geographic pattern of U.S. trade has shifted. Mexico and, to a lesser degree, China have surpassed Japan in U.S. trade .http://www.fas.org/sgp/crs/row/RL32649.pdf REFERENCES: http://www.ustr.gov/assets/Document_Library/Reports_Publications/2006/asset_upload_file921_8938.pdf 'http://www.cfr.org/publication/10482/uneasy_uschinese_trade_relationship.html 'http://www.cfr.org/publication/10482/uneasy_uschinese_trade_relationship.html 'http://www.petersoninstitute.org/publications/wp/wp.cfm'ResearchID=162 (http://www.epi.org/workingpapers/epi_wp270.pdf) http://www.state.gov/p/eap/rls/64718.htm Read More