Mrs. Johnston



US Trade Deficit With China and Why It's So High: The Real Reason American Jobs Are Going to China By Kimberly Amadeo Updated March 27, 2019 The U.S. trade deficit with China was $419?billion in 2018.?The trade deficit exists because U.S.?exports to China were only $120 billion while?imports from China were $540 billion.?The biggest categories of U.S. imports from China were computers and accessories, cell phones, and apparel and footwear. A lot of these imports are from U.S. manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports.?China's biggest imports from America are commercial aircraft, soybeans, and autos. In 2018, China canceled its soybean imports after President Trump started a trade war. He imposed tariffs on Chinese steel exports and other goods.Current Trade Deficit From January 2018 to July 2018, the United States exported a total of $74.3 billion in goods to China. During that same timeframe, the U.S. imported $296.8 billion, according to the U.S. Census Bureau. As a result, the total trade deficit with China is $222.6 billion. A monthly breakdown is in the chart.Causes China can produce many consumer goods at lower costs than other countries can. Americans, of course, want these goods for the lowest prices. How does China keep prices so low? Most economists agree that China's competitive pricing is a result of two factors:A lower standard of living, which allows companies in China to pay lower wages to workers.An exchange rate that is partially fixed to the dollar.If the United States implemented trade protectionism, U.S. consumers would have to pay high prices for their "Made in America" goods. It’s unlikely that the trade deficit will change. Most people would rather pay as little as possible for computers, electronics,?and clothing, even if it means other Americans lose their jobs.China is the?world's largest economy. It also has the world's biggest population. It must divide its production among almost 1.4 billion residents. A common way to measure the standard of living is?gross domestic product per capita.?In 2017, China’s GDP per capita was $16,600. China's leaders are desperately trying to get the economy to grow faster to?raise the country’s living standards. They remember Mao's Cultural Revolution all too well. They know that the Chinese people won't accept a lower standard of living forever.China sets the value of its currency, the?yuan, to equal the value of a basket of currencies that includes the dollar. In other words, China?pegs?its currency to the dollar using a modified?fixed exchange rate. When the dollar loses value, China buys dollars through?U.S. Treasury’s?to support it.?In 2016, China began relaxing its peg. It wants market forces to have a greater impact on the yuan's value. As a result, the?dollar to yuan conversion?has been more volatile since then.?China's influence on the dollar?remains substantial.Effect China must buy so many U.S. Treasury notes that it is the largest lender to the U.S. government. Japan is the second largest.?As of?December 2018, the?U.S. debt to China was $1.12 trillion. That's 28% of the total?public debt?owned by foreign countries.Many are concerned that this gives China political?leverage?over U.S.?fiscal policy. They worry about what would happen if China started selling its Treasury holdings.?It would also be disastrous if China merely cut back on its Treasury purchases.Why are they so worried? By buying Treasury, China helped keep U.S.?interest rates?low. If China were to stop buying Treasury,?interest rates would rise. That could throw the United States into a recession. But this wouldn’t be in China's best interests, as U.S. shoppers would buy fewer Chinese?exports. In fact, China is buying almost as many?Treasury as?ever.U.S.?companies that can't compete with cheap Chinese goods must either lower their costs or go out of business. Many businesses reduce their costs by?outsourcing jobs?to China or?India. Outsourcing adds to U.S.?unemployment. Other industries have just dried up.?U.S. manufacturing, as measured by the number of jobs, declined 34%?between 1998 and 2010.?As these industries declined, so has U.S. competitiveness in the global marketplace.?What's Being Done President Trump?promised to lower the trade deficit with China. On?March 1, 2018,?he announced?he would impose a 25%?tariff?on steel imports and a 10% tariff on aluminum. On July 6, 2018, Trump's tariffs went into effect for $34 billion of Chinese imports. China canceled all import contracts for soybeans.Trump's tariffs have raised the costs of imported steel, most of which is from China. Trump's move comes a month after?he imposed tariffs and quotas?on imported solar panels and washing machines.?China has become a global leader?in solar panel production.?The tariffs depressed the stock market when they were announced.The?Trump administration is developing?further anti-China?protectionist measures, including more tariffs. It wants China to remove requirements that U.S. companies transfer technology to Chinese firms. China requires companies to do this to gain access to its market.Trump also asked China to do more to raise its currency. He claims that China artificially undervalues the yuan?by 15% to 40%. That was true in 2000. But former?Treasury Secretary Hank Paulson?initiated the U.S.-China Strategic Economic Dialogue in 2006. He convinced the People's Bank of China?to strengthen the?yuan's value against the dollar. It increased by?2% to 3% annually between 2000 and 2013. Former U.S.?Treasury Secretary Jack Lew continued the dialogue during the?Obama administration. The?Trump administration continued the talks until they stalled in July 2017.The?dollar strengthened?25% between 2013 and 2015. It?took the Chinese yuan up with it. China had to lower costs even more to compete with Southeast Asian companies. The PBOC tried unpegging the yuan from the dollar in 2015. The yuan immediately plummeted. That indicated that the yuan was overvalued. If the yuan were undervalued, as Trump claims, it would have risen instead.?----------------------------------------------------------------------------------------------------------------------------------------------------------------China's Economy and Its Effect on the U.S. Economy: The Surprising Ways China Affects the U.S. Economy By Kimberly Amadeo Updated April 18, 2019 China's economy?produced $23.12?trillion in 2017, based on?purchasing power parity. It's the?world's largest economy. The?European Union?is second, at $19.9?trillion. The United States fell to third place, producing $19.3 trillion.China has 1.38?billion people, more than any other country in the world. China is still a relatively poor country in terms of its?standard of living. Its economy only produces $16,600 per person, compared to the U.S.?gross domestic product per capita?of $59,500. The low standard of living allows companies in China to pay their?workers less than American workers. That makes products cheaper, which lures overseas manufacturers to?outsource jobs?to China.?They then ship the finished goods to the United States, China’s largest trading ponents of China's Economy? China built its economic growth on low-cost exports of machinery and equipment. Massive government spending went into state-owned companies to fuel those exports. These state-owned companies are less?profitable than?private firms. They return only 4.9 percent?on assets compared to 13.2 percent for private companies.These companies dominate their industries. They?include the big three energy companies: PetroChina, Sinopec, and?China National Offshore Oil Corporation.China developed cities around these factories to attract workers. As a result, one-fourth of China's economy is in real estate. The government also funded construction of railways and other infrastructure to support growth. As a result, it imported massive amounts of commodities, like aluminum and copper.?By 2013, the 10 percent?annual growth threatened to become a bubble.?That's when China looked toward?economic reform.China spends?9 percent of GDP on infrastructure. In 2013, it launched the?One Belt, One Road?Initiative, the?largest global infrastructure project?in history.?China will spend $150 billion a year to link 68 countries along the old Silk Road?with Europe. It will build ports, railways, and pipelines.?It?plans?to make a China-dominated Eurasia?an economic rival to the American-dominated transatlantic trading area.China's president, Xi Jinping, hopes the project will accomplish four objectives:Provide investments for China's foreign exchange reserves. Most of them are tied up in low-return?U.S. Treasury.Provide new markets for China's high-speed rail firms, and for cement, steel, and metal exports.Stabilize countries on China's western border.Increase China's claims in the South China Sea.China's Exports China regained its position as?the world's largest?exporter?in 2017, when it exported?$2.2?trillion of its production. The?EU briefly took the No. 1 spot in 2016. It now is second, exporting $1.9 trillion. The United States is third, exporting $1.6 trillion.?China shipped 18 percent?of its exports to the United States in 2018. That contributed to a?$419 billion trade deficit. China's trade with?Hong Kong, at 14 percent, was almost as much. Its trade with?Japan, which was at 6 percent, and South Korea, at 4.5 percent, was much less.China encouraged trade with African nations, investing in their infrastructure in return for oil. It increased trade agreements with Southeast Asian nations and many Latin American countries. That's why?President Obama?launched the?Trans-Pacific Partnership?trade agreement. It doesn't include China. One of its goals was to balance China's growing power in the region. In January 2017,?President Trump?withdrew from the TPP. But the?other countries have continued?with it?on their own.China does a lot of?manufacturing?for foreign businesses, including U.S. companies. They ship raw materials to China. Factory workers build the final products and ship them back to the United States. In this way, a lot of China's so-called "exports" are technically American?products.China primarily exports electrical equipment and other types of machinery. This includes computers and data processing equipment as well as optical and medical equipment. It also exports apparel, fabric, and textiles. It's the world's largest exporter of steel.?China's Imports China is the world's second largest importer. In 2017, it imported $1.7?trillion. The United States, the world's largest, imported $2.3 trillion. China?imports raw?commodities?from?Latin America?and Africa. These include oil and other fuels, metal ores, plastics, and organic chemicals. It's the world's largest importer of aluminum and copper.?China’s commodity consumption?has fueled a world-wide boom in mining and agriculture. Unfortunately, suppliers over-produced, creating too much supply. As a result, prices cratered in 2015. As China's growth slows, prices for commodities used in manufacturing, such as metals, will drop.?How China Affects the U.S. Economy China is the largest?foreign holder?of?US Treasury. In February 2019, China owned $1.13 trillion in Treasury. That's 18?percent of the?public debt?held by foreign countries. The?U.S. debt to China?is lower than the record high of $1.3 trillion held in November 2013.?China buys U.S. debt to support the?value of the dollar. This is because China?pegs?its currency, the?yuan, to the?U.S. dollar. It devalues the currency when needed to keep its export prices competitive.?China's role as America's largest banker gives it?leverage. For example, China threatens to sell part of its holdings whenever the United States?pressures it to raise the yuan's value. Since 2005, China raised the?yuan's value by?33 percent?against the dollar. Between 2014 and 2016, the dollar's strength increased by 25 percent. The rise forced China to devalue the yuan. This ensured its exports would remain competitively priced with those from Asian countries that hadn't tied their currency to the dollar.U.S. Accusations of Unfair Trade Practices On January 22, 2018, President Trump?imposed tariffs and?quotas?on imported Chinese solar panels and washing machines.?China is a world leader in solar equipment manufacturing. The World Trade Organization ruled that the United States didn't have a case in levying the tariff.On March 8, 2018, Trump announced a 25 percent tariff on steel imports and a 10 percent tariff on aluminum. On July 6, Trump's tariffs went into effect for $34 billion of Chinese imports. In return, China levied?a?40 percent tariff on U.S. autos and agricultural exports.On August 2, 2018, the administration announced a 25 percent tariff on $16 billion worth of Chinese goods. In response, China announced a 25 percent tariff on $16 billion worth of U.S. goods.These accusations are nothing new. China's unfair trade practices were?also a hot topic during the?2012 presidential debate. During that debate, President Obama recounted how the U.S. Department of Commerce successfully brought many disputes to the?World Trade Organization?over unfair practices involving tires, steel, and other materials. The?WTO has a specific process to resolve trade disputes.In 2006, President Bush appointed?Henry Paulson?as U.S. Treasury Secretary to lower the?trade deficit?with China. He initiated the “Strategic Economic Dialogue” to open China's market, especially its?banking industry. He had several successes.?He persuaded Chinese leaders to raise the?yuan's value when compared?to the dollar?20 percent?between 2005 and 2008. They also eliminated a 17 percent?tax rebate for exporters. They increased the?reserve requirement?for?central banks?to 12 percent. They also invested?$3 billion in the U.S. Blackstone Group.In 2007, the Commerce Department threatened to apply penalty?tariffs?to Chinese products. For example, it accused China of?dumping?its paper exports into the United States. The Commerce Department claimed that?China unfairly provided subsidies of 10-20 percent?to its manufacturers of glossy paper used in books and magazines. Trade volume had grown 177 percent in one year. The U.S.-based New Page Corporation brought the anti-dumping case to the Commerce Department. It said it could not compete against subsidized prices.Why China Was Deliberately Slowing Its Growth In August 2018, China's spending on fixed assets such as factory machinery and public works slowed to its lowest point in 20 years. In 2017,?China's?economic growth?rate slowed?to 6.8?percent. Part of that was a deliberate strategy to head off an economic bubble before it burst.Before 2013, China?enjoyed 30 years of double-digit growth.?But government spending?was the driving force that fueled it. The government also mandated its banks provide?low interest rates?in return for protection of the strategic industry. It created business investment in capital goods. It also led to?inflation, a real estate?asset bubble, growth in?public debt, and severe pollution.?The government's emphasis on job creation left little funding for social welfare programs. As a result, the Chinese population was forced to save for retirement. They didn’t spend, strangling domestic demand. Without robust consumer spending,?China was forced to rely on exports to fuel growth.Most of the growth occurred in the cities along China's east coast. These urban areas attracted 250 million migrant workers from the countryside. Chinese leaders must continue to create jobs for all these workers?or face unrest. They remember Mao's Revolution all too well. The government must provide more social services, allowing workers to save less and spend more. Only an increase in domestic demand will enable China to become less reliant on exports.In addition, leaders must crack down on local corruption. They must?find ways to improve the environmental impact of industrialization. Leaders have embarked on an ambitious nuclear and alternative energy program to reduce reliance on dirty coal and imported oil.?China signed the Paris Climate Accord. All of these measures are part of?China's economic reform.Trump's trade war?interferes with China's plan to slow down. To keep the economy strong, China's leaders have had to lower interest rates and fund infrastructure projects. In October 2018, China's central bank pumped $175 billion into the economy to keep it from stalling.How China Avoided the Great Recession During the?financial crisis of 2008, China?pledged 4 trillion yuan, about $580 billion, to stimulate its economy to avoid the?recession. The funds represented 20 percent?of China's annual economic output. It went toward low-rent housing, infrastructure in rural areas, and construction of roads, railways, and airports.China also increased?tax deductions?for machinery, saving businesses 120 billion yuan.?China raised both?subsidies?and grain prices for farmers, as well as allowances for low-income urban dwellers.?Its central bank also dropped?interest rates?three times in two months.??It eliminated loan quotas for?banks?to increase?small business?lending.?But?now China's companies are?struggling to repay that debt. Combined private/public debt is two and a half times greater than its GDP.Shanghai Cooperation Organization The Shanghai Cooperation Organization?is a central Asian military alliance that combats?terrorism and drug trafficking while supporting?free trade agreements.?Its members share intelligence and combine military operations to counter both terrorism and cyber-terrorism. It is China's version of the?North Atlantic Treaty Organization.Its members are?China,?Russia, and the countries along their borders. These are Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan.?In June 2016,?India?and Pakistan were accepted as members. The group represents almost half of the world's population. Now it also has four members which have nuclear weapons: Russia, China, India, and Pakistan.For that reason, most nearby countries also participate. They can either be observers, dialogue partners, or guests in attendance. Observers are in the process of becoming full members. They include Afghanistan, Belarus, Iran, and Mongolia. The six Dialogue Partners share goals but don't want to become members. They are Armenia, Azerbaijan, Cambodia, Nepal, Sri Lanka, and Turkey. The Guest Attendees participate in the summits. Their members include the?Association of Southeast Asian Nations, the Commonwealth of Independent States, and Turkmenistan.Directions: In the space below, explain the trade relationship between the United States and China. Be sure to include how and why these two countries are partners in trade, how the relationship is currently strained and lastly, what effect this trade conflict has on both nations. These answers need to be in full sentences and with evidence from the two articles. ................
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