The Effect Of China As A Power House On U.S. Economy Essay Example for Free

The Effect Of China As A Power House On U.S. Economy Essay Analysts have described the rise of China as a poor, stagnant country to an economic powerhouse as the greatest economic growth of this modern time. Studies show that, from 1979 when the first economic reform was made to 2006, China’s economy has increased by over 11 folds. Its gross domestic products grew at an annual rate (GDP) of 9. 6 percent and its real per capita GDP grew to over eight folds. Its world trade ranking rose from 27th to 3rd and its is projected to be the first in the next decade. Because of this rise, the business relationship between the U. S and China has grown over the recent decades. The U. S. -China economic relationship rose from $4. 3 billion in 1983 to $343 billion in 2006. For the United States, China has become their second largest trade partner, most imports done in the United States come from China and these imports amounts to billions yearly. China is also the fourth largest export market for the U. S. economy and the second largest for its imports. The purchasing power of the U. S. citizens is increased due to the inexpensive imports from China. In addition, many U. S manufacturing firms also have most of their manufacturing done in China. This is to take advantage of the huge Chinese market and the cheap labor force that is available to them. China’s purchases of U. S. Treasury securities have funded federal deficits and helped keep interest rates relatively low. Though despite the perceived threat of China’s economic growth, unites states economy has maintained a full employment rate and robust economic growth. Nevertheless, the rise of China as an economic powerhouse has raised concern among many U. S. policy makers. Their fears include the taking over of China as the world’s largest trade economy in the next few years and the world’s largest economy in the next two decades. Going by this view, it is believed that the rise of China begins the relative fall of U. S. another point of concern is the large business relationship between U. S. and China which is value at about $343 billion. The view projected is that China use unfair trade practices. One of those practices are the supply of low priced products, thereby not encouraging exports from the U. S. the practices put threats to U. S. jobs, wages and living standards. The situation tends to worsen when China moves towards improving the quality of products done by them like autos and computers. Some of the recent development is the efforts put forward by China state owned firms to acquire U. S companies and the accumulation of U. S. Treasury securities. Policy makers have expressed concern over chin’s large holdings of U. S. securities and Treasury securities. They believe that China could use it as a political tool against the United States. This I agree with because with such holdings, China can have the power to make dollar collapse if they want. They can do this by liquidating their large portion of their large portion of U. S. Treasury securities holdings if the Unites States impose sanction on the revaluation of Yuan and the threat to do so could be used as a bargaining chip. Looking at all this, one would ask a question; what will the trade with China do to America’s economy? He trade deficit with China has grown to a significantly over the recent years. This is due to the large imports f China’s product into United States and the large exports of America’s products to China. This trade deficit with China has grown larger than any other trade deficit that America has with any other country. The fears are still growing over policies done by the Chinese to boost their exports into U. S and restricting American products into China. EFFECT ON TRADES AND JOBS The effect of the rising status of China on the U. S economy carries a mixed effect. On some sectors of employments and jobs, it carries a positive and negative effect. The imports done from China can destroy most of America’s jobs and manufacturing firms that produces same products. Analysis shows that the current inflow of imports is likely to increase the rate of job loss. The closing down of companies could reduce the economic standard of the country. The relative steadiness of full employment and output are two complementary reasons in the face of steady imports and disruptive markets. The use of monetary policy by the Federal Reserve to control the rate of spending in the country to the level generally consistent with full employment. A well run monetary policy can minimize the deviations that can occur in full employment sector and reduce the duration of such episodes. It helps keep the level of employment high in most years despite trades in general. Giving a better example and expositions to job losses and its relationship to total employment, considering that in any quarter of 2000, the peak of the last economic expansion, the total American jobs of about 137 million, the total job losses was about 9 million and most them was as a result of the foreign trade done. Another similar case was the total job loss of about 7. 4 million in 2004. Apart from the job loss due o foreign trade, the industries are the ones that are hit hard. Secondly, looking at purchasing imports. The increase in the price of imports would also increase the prices of exports. This outcome flows from the fundamental economic requirements hat imports must be paid for and exports are the only means of making those payments. The exports that are sold could be already finished goods and services. It can also be the sale of assets to foreigners such as savings in the bank, shares and stocks, bonds and real properties. This is to say that, when tallied across transactions in assets or goods, a nations trade is always in balance and in any in balance in the trading of goods must be compensated with in balance in the trading of assets. Therefore, most types of exports have positive effect on employments. There is a positive effect of exportation of goods from U. S. on employment is high. When foreigners increase their purchase of exported goods, the total output and employment increases. This counters the level of job lost that is caused by the rate of importation. Therefore, this is to say that the large Chinese market has a positive effect on the employment rate of the United States. Looking at it from another point of view, because the sale of assets is equal to the level of savings in the United States, it exerts a downward push on the domestic interest rates. This stimulates the interest sensitive activities such as spending on consumer durables, residential constructions, raising output, and employments in this sector. Therefore, this is to say that the negative effect of imports on the economy and the rate of employment are offset by the increased rate of exports from other parts of the economy. Another common concern of the rising status of China is that is puts downward pressure on the wages of domestic workers. Foreign trade is seen by American companies as the search fro a low-cost labor environments. This is turn will place American workers in a competition of low wage working environment. This is what is termed as race to the bottom between domestic and foreign workers. In a general summary, China’s economic growth has increased substantial commercial business activities with the U. S economy. It is now the third largest U. S. trade partner, the second largest source of import and the fourth largest source of exports. Status showing for over the past five years, China is fast becoming the rising source of exports for U. S. goods and is likely to me a good market for U. S. products provided that trades barriers continues to fall. It is projected that within two decades, China will surpass the United States and become the world’s largest economy. It is believed that any fall in the living standard of U. S. will lead to the rise in China’s status. The high level of low-cost imports from China has benefited the U. S. in many ways. First, the low imports have helped to keep the rate of inflation down. It has increased the overall consumer welfare, enabling them to be able to purchase other goods and services. Finally, the low-cost imports have benefited many U. S. firms that use these imports for the production of their goods. This is of course making the U. S. firms very competitive. Although this rise is often seen as a threat, economists see it as mutually beneficial to both parties. This is to say that both economies need each other to keep up. Looking at low-cost imports from other points of view, the imports from China has negative effect on some firms and jobs such as the textile industries. The import causes diminishing effects on their level of output, wages, and employments. Nevertheless, it is believed that the imbalances in trade between these countries are not the cause for the job loss and low output. Most economists contend that, the rise the value of Chinese currency would not have any effect on the manufacturing industries. They maintain that the appreciation would largely shift manufacturing to low-wage countries not to the United States. China maintains a number of inefficient and distortionary policies such as Government Financial Support for CEOs, industrial polices tend to assist investors. Economists note that although subsidies on exports can negatively affect import-competing domestic firms and workers, they also benefit consumers and users of imported inputs who can obtain such goods at lower prices than under the conditions of free trade. In effect, this improves the U. S. terms of trade because it means a given level of U. S. exports can obtain more imports. On the other hand, the use of subsidies by China lowers its terms of trade and promotes inefficiencies in the economy. Even if Chinese subsidies produce net benefits to the U. S. economy, many U. S. policymakers oppose their use because they do cause some U. S. firms and workers to suffer. Public perceptions that some countries are not playing by the rules of trade may impact their support (and that of their government representatives) for further trade liberalization on a bilateral on multilateral basis. Some trade practices, such a failure to protect IPR, hurt both the U. S. and Chinese economies. China traditionally has focused on low-end, labor-intensive manufacturing, much of which did not compete directly with U. S. firms. However, China is attempting to move into more advanced production and hopes to become globally competitive in a number of industries, such as autos and information technology. This has raised concerns that China may pose the kind of competitive challenge to major U. S. industries that Japan posed during the 1980s. Although it is difficult to accurately predict how advanced China’s economy will become, it currently lags significantly behind the United States. The divergent experience of the U. S. and Japanese economies since the 1990s suggests that the competitive threat from China is questionable, especially considering the extensive economic challenges China faces in the years ahead. Chinese purchases of U. S. Treasury securities have helped the federal government fund its budget deficits and therefore have helped keep U. S. interest rates down. At the same time, China has become the second-largest foreign holder of these securities, and some analysts contend that this status gives China economic leverage over the United States. But any attempt to harm the U. S. economy by unloading these holdings would likely cause comparable harm to the Chinese economy. Similar arguments are made regarding China’s attempts to purchase U. S. companies. However, analysts contend that it would not be in China’s economic interest to purchase U. S. companies if it did not intend to operate them profitably. In general, given the growing importance of the U. S. economy to China’s economic growth, policies to destabilize the U. S. economy would destabilize China’s economy as well.