United States and China Economic Relation

Topics: United States, International trade, Balance of trade Pages: 6 (2216 words) Published: April 12, 2011
The IP ADR Blog
In 2010, China became the world largest exporter. Before 1997, China’s economy was based on a closed, centrally planned system and then they changed to a market oriented system with a major role in the global economy. Today, China is the United States second largest trading partner, its fourth largest export market and second largest source of imports. Total trade with the United States has grown from $4 billion in 1980 to approximately $343 billion in 2006. This impressive growth brings with it several issues that at this time make the economic relation between the U.S. and China full of conflicts. Some of these issues are Currency Manipulation, Trade Imbalances, Intellectual Property Rights and China’s Indigenous Innovation. Theoretical Framework

As Joseph C. H. Chai said in his book “China: Transition to a Market Economy”; this economic transition can be divided in three stages. The first stage took place from 1979 to 1984. By this time China had a planned economy with just a few aspects of a market mechanism being introduced. Reforms during this period were strongly focused on the agricultural sector. Both the foreign trade and foreign investment regime were still heavily regulated (Chai, 1997). The second stage took place from 1985 to 1991. In this period of time the reforms in China were more focused on the urban sector. The final purpose of these reforms on China’s economic system was to give more control to the markets in terms of resource allocation and the government would only have some indirect control through the market. Some of these reforms include: the strengthening of enterprise autonomy, liberalization of product and factor prices, and the further liberalization of foreign economic relations. Finally, the third stage took place in 1992; when the China’s Congress finally decided to establish a full market economy putting aside the concept of a planned economy. Currency Manipulation

Nowadays there is a huge debate about the China’s supposed currency manipulation. Even though last Friday February 4th, the US Treasury released the semi-annual report on currency issues affirming that China does not manipulate their currency in order to have an unfair international advantage. Anyways many Americans and other people around the world strongly believe they do manipulate their currency. Michael Freimuth

To begin with, how does a country (in this case China) manipulate their currency? It is said that the Chinese government sells its own currency and buys massive amounts of US dollars to make a reserve. This action pegs the Yuan value which does not allow it to move freely in the foreign exchange market. Some economist thinks that the Chinese Yuan is undervalued around 20%. This action brings major effects in exporters and importers competitors, consumers, borrowers, and the entire U.S. economy in general. By making the Chinese Yuan less expensive than the U.S. dollar Chinese exports become comparatively inexpensive and U.S. exports comparatively expensive. As stated before, China has become the second largest import partner; these imports are majorly labor-intensive goods. By this, there are a number of U.S. industries being affected by the currency manipulation making them less competitive because China’s undervalued currency contributes to a reduction in the output of these industries. In the end this causes a US trade balance deficit. The undervalued Yuan also affects US borrowers. Chinese central bank and private citizens are investing in U.S. assets; this greater demand for U.S. assets puts pressure on U.S. interest rates. According to the U.S. Treasury Department, China held around $347 billion in US Treasury Securities making them the second largest holder; but if the deficit with China was eliminated, Chinese capital would no longer flow into this country. For consumers an undervalued Chinese currency lowers the prices of China’s imports making them more accessible to U.S....

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