China is an Eastern Asia country whose modern history which is what has led to its definition ‘Modern China’ dates back to 1978. This year is very significant in both the economic as well as political history of China. This was the year that saw China transform from a centralized form of economy to a free market economy where the forces of demand and supply took charge. (CIA). Since then, the sky has been the limit for this once stagnant economy. China’s economic growth for the past 2 ½ decades has been rising at an average of 9.7% and its five times what the US has had for the same period of time and this justifies the concerns that China might become a super power given her economic well being. This paper will focus on China’s economic growth and how it affects the US economy.
According to Craig Elwell and Marc Labonte in the article ‘Is China a threat to the US economy’, China’s economy has increased by over 11 times and it ranks the 3rd position in terms of world trade. They also argue that China’s economic growth has precipitated a good economic relationship with the US. The total trade between the two countries is said to have rose from $4.9 billion in 1980 to a tune of $343 billion 26 years down the line. Woo Wing in ‘The economic impact of China’s emergence as a major Trading nation’, however argues that although China has increased her exports tremendously, there should be no reason to worry as there is no state or nation that can be 100% self sufficient. China will need to import products from other regions or nations too. This will ensure that countries also gain from her economic growth. (Wing W, 2003).
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Most US companies as well as individuals have intensified their investment in China to take advantage of the growing economy. There are many advantages of investing in China for any US industry or firm. China is well known for her high population which will definitely ensure that there is adequate supply for labor, a very important factor of production. When there is surplus labor supply the wage rates will tend to be lower given their inverse relationship. The importance of this is that it will be cost effective for the firms thus increasing their profitability levels significantly. (Elwell C and Labonte M, 2007).
Elwell and Labonte argue that China’s growth has been of a positive impact on the US economy. To them, China has a potentially huge market for US products and this is a clear sign that the two can be major partners in trade. This is a plus to the US economy which will earn foreign exchange from the trading practices with China. In terms of exports, China has emerged to be the fastest growing market for the US. For the imports China has also outdone other Asian countries in supplying manufactured products to the US economy. This is important especially at the recent times when inflation has made the cost of living in America unbearable to many. China comes in handy to ensure the supply of cheaper manufactured goods. Another impact of the low cost imports is that they have had an influence on people’s purchasing power and their demand for other goods. This is attributed to the fact that given a certain amount of income, prices of goods have a direct effect in determining one’s disposable income which influences demand. China has also had a significant effect in as far as the US security markets are concerned. She ranks the second largest US treasury security purchaser and this is important in as far as the financing the federal government’s budget deficit is concerned. (Elwell C and Labonte M, 2007).
Many concerns have been raised that if China maintains the current trend in economic growth she might outdo the US as a superpower. In this regard, China’s ‘success story’ is viewed as a US ‘downfall story’. Increased imports from China could also be of a negative effect on the US. It could be a cause of reduced economic growth as the demand for Chinese manufactured goods outdoes the demand for similar US manufactured goods. This would lead to the closure of manufacturing plants which would see many people laid off. Another effect of increased imports from China on the US economy is that it would affect the US wage rates by stagnating them. (Elwell C and Labonte M, 2007).
Statistics have it that for a period of 5 years from 2001 the US exports to China have risen by 118% and this indicates clearly that China will soon overtake Japan and emerge the 3rd largest export market for the US. China is a major importer of US products especially those that are labor intensive. Statistics also indicate that 10 years down from 1996 China registered a growth of approximately 9 % in as far as US total imports were concerned. China has raised through the ranks from being the 8th US products’ importer to maintaining the 2nd position for 2 successive years. Goods imported from China by US include computers, toys, computer games as well as communications related equipment. (Elwell C and Labonte M, 2007).
Major US companies that have invested in China include Motorola, General Motors, Dell Computer, Hewlett-Packard and Kodak. These companies benefit the Chinese economy as for instance Motorola, the largest US company in China employs about 9,000 Chinese and their investment in the country has economic advantages to China. (Elwell C, 2006). Motorola’s investment in China saw her emerge as a market leader due to the large market. It is estimated that over 500 million people had their own mobile phone handsets. (Einhorn B, 2008).
The Chinese government allows or rather encourages countries to invest in her, an approach that is criticized on the basis that it could harm the domestic industries. There is a wide trade deficit between the US and China which is attributed to the fact that the rate at which US exports her products to China is not equivalent to the rate at which China imports US goods or products. Statistics have it that trade deficits have raised by over $200 billion from 1994 through to 2006. This is an issue that raises concerns among many and it’s attributed to unfair trade policies or practices to have a stand a better edge in trade. Some critics argue that China is guilty of manipulating the currency to influence the dollar value, the application of barriers on trade and investment, inefficient legal systems that hinders the effective protection of intellectual property, engagement in dumping practices as well poor labor standards. (Elwell C and Labonte M, 2007).
Concerns that increased outsourcing or engagement of foreign direct investment (FDI ) could result to reduced jobs could be countered by the fact that in an economy where monetary policies are effectively implemented the chances of having a national impact are minimal ‘History’ has it that even in the face of economic expansion as was the case in 2001, jobs in the US were not undermined by increased FDI to China.
China’s registration or membership in the World Trade Organization (WHO) ensured that trade and investment barriers were eliminated. However, some critics argue that their expectations are not met as China does not fully adhere to ‘the set rules’. Although China embraced free trade or markets that has not been 100% effective. The government’s influence on industries is very significant. It at times sets guidelines on how production is to be carried out. Going by what most policy makers argue, China deviates from the standards of WHO. (Morrison W, 2008).
Regarding US competition with China, US could argue that they are not on the same ground given the fact that China is very reluctant to adhere to set environmental as well as labor standards. China will by all means stand a better chance when the two compete. She compromises on the environment and quality to lower prices which attracts a higher demand for their products. Unless the US companies does the same comparing the two would be unfair. The issue of International Property Rights is of importance when addressing the issue of US FDI’s in China. It is estimated that US loses billions in terms of dollars due to piracy in China. (Aldonas G, 2003).
The increased demands for products precipitated by China’s economic growth are to some, a point of concern. This is attributed to the fact that the growth is already the cause of the rising world oil prices which are likely to precipitate increased world commodity prices. When this happens, the US will definitely be affected as it’s a superpower and part of the world economy. This will affect the US economy by raising the standards of living due to increased commodity prices. Assuming that household incomes will be constant, they will have minimal savings hence reduced investment translating to stagnant economic growth. China is of significant importance in as far as the US economic growth is concerned. Its purchasing the US treasury securities is a plus on the economy as when it ensures that the interest rates are low it encourages investment which ensures economic growth.
Wayne Morrison in ‘China-US Trade issues’ supports the findings of Elwell and Labonte. He noted that the strained trade relationship between China and US were attributed to the increased unfair trade practices by China. He further noted that China had established a diplomatic relationship with US in 1979 that made her acquire ‘a mutual most favored-nation’ (MFN) where China would be given a priority by the US in as far as trade with (WTO) country members. When China became a member of WTO it sought for leniency as it had rose very fast in short span of time. However, she seems to be ‘abusing’ the leniency given her unwillingness to ‘playi by the rules’. In 2000, the US through the enactment of ‘Permanent Normal Trade Relations’ (PNTR) Act ‘normalized’ China’s position. It was to be given similar treatment with other WTO member countries. This would enable China’s products to effectively compete with the US goods. (Morrison W, 2008)
Increased FDI in China is a plus to her economic growth and development. This is attributed to the fact that FDI’s would lead to positive externalities like technological transfers to industries in the respective specialties as well as those in other specialties.
Scherer Ron in the article ‘An outsourcing reversal’ Chinese firms in US, notes that as US firms invest in China, some Chinese firms are showing their investment interests in US. The Chinese are to reverse the increase US to China investment in her ambition to go global. However, there is need for the Chinese companies to restructure some approaches for instance the use of English and easier to understand names. (Ron S, 2008).
Elwell in ‘Chinese Economy: How will it affect the US gains from Trade?’ argues that the benefits that the US would have from her trade relationship with China would according to economic theories be dependent on the comparative advantage that US has over China. China is endowed with low skilled labor although she has a relatively low human and physical capital as well as technical knowledge. In contrast the US has abundant human and physical capital, high technological knowledge and a low skilled labor. As the US exports goods or products that demand for high skilled human capital like aircrafts, pharmaceuticals and software the Chinese economy will concentrate in exporting goods that are easy to produce using low skilled labor like toys and footwear.(Elwell C, 2006).
Elwell also noted that the trade relations between China and the US would surely have an effect on the prices of imports as well as exports in the US. It suffices to say that China’s economic growth will to a large extent affect the rate at which the US will gain from the trade between the two. (Elwell C, 2006) Allegations that China influences her foreign exchange rate to make her products more competitive against the US goods are a source of concern. This unfair trend makes China’s product cheaper compared to US products thus deviating demand to the Chinese products. This issue has led to negotiations by the two presidents so that there is equal footing in the market.
China’s economic growth may be negatively affected if the Chinese government fails to address vital issues like pollution, corruption and unclear business laws. Pollution is a point of concern that must be addressed effectively to reduce the possible negative effects that would be of a global effect. It is also a cause of protests or demonstrations which pose a threat to the future of investment. Clear laws, rules and business regulations must also be enacted to ensure a safe environment for the investors. The government must also be keen and stop supporting inefficient firms which only works to drain the country’s valuable economic resources. The UN established that the future of economic growth in China could be affected negatively due to her social stability conditions. It argued that widening gap between the rich and the poor in china was a threat to her social stability status. There is need to change this as it would be of a negative impact in as far as the economic growth was concerned. Social instability leads to political unrests that discourage investment. China’s negative economic growth could have negative effects on the US economy given the various benefits it accrues from her.
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