China's economic relationship with the United States

¶ … China a Threat to the U.S. Economy?

Many people feel threatened by the rapid growth or China's economy. Some are concerned that China's large population of low-cost workers will eventually damage the United States economy. Many worry that China's inexpensive goods will cause trade problems. Despite these concerns, it is important to note that China's largely untapped market actually presents opportunities for the U.S. economy.

China's fast economic growth, foreign direct investment, and share in foreign trade markets confirm that China is indeed a rising economic power (Lardy, 2002). For this reason, many Americans are quick to blame China for a loss of jobs in the U.S. And for the increasing bilateral trade deficit that the United States has with China. However, it is also important to consider China as the fastest-growing large U.S. export market and see substantial opportunities.

According to Professor Qu Xing (People's Daily, 2005): "As a large country with a huge population and a vast expanse of territory, China has always been the object of attention from other countries. The "China threat theory" has its historical origin. In history, there was the shadow of the "China threat theory" in the famous Napoleon "saying of awaked lion," the "yellow peril theory" prevalent in Europe, and the "white Australian policy" Australia once adopted. This reflects the mindset of vested inerest possessor of the "latecomers" of whom some first developed countries are afraid. This history of international relations has repeatedly confirmed "the theory of the danger of latecomers" such as Germany and Japan, latecomers who used force to change the international order, launched external aggression and ignited world wars. The "mindset of vested interests holders" has its "theoretical basis." So, now when China is developing at high speed and exerting growing influence on the world, the emergence of the "China threat theory" in the world is imaginable."

There are valid reasons for these fears. In 2002, China received the most foreign capital inflows of any nation, surpassing the United States as the world's choice for investment (Kurlantzick, 2003). In addition, Chinese wages, which average around 60 cents in manufacturing jobs, are not rising in most fields. According to Ming-jer Chen, a China business expert at the University of Virginia, China's growing labor pool, the result of increased migration from poor interior areas to richer coastal regions, seems likely to guarantee low-wage labor in most industries, at least for the near future.

Increased Chinese production by low-wage workers, combined with the undervalued Chinese currency, helps China to beat competitors, resulting in a kind of deflation that may push some American. firms out of business. For example, some U.S. textile manufacturers find it hard to compete now.

The increasing bilateral trade deficit with China suggests that China is now supplying the United States and other advanced industrial countries with goods that previously were produced elsewhere, primarily in emerging Asia (Lardy, 2002). The country's external trade has expanded even more rapidly than its economy, demonstrating a substantial increase in openness over the past two decades.

China's inflows of foreign direct investment are yet another indicator of its economic rise. China has significantly opened its economy to foreign investment in recent years and continues to do so. China's recent reforms have significantly increased competition, in manufacturing, construction, service, and other sectors.

It is important to note that foreign firms operating in China are adding substantially to competition in the domestic market (Lardy, 2002). Foreign companies make up more than a quarter of the output of manufactured goods. While it is true that many foreign companies use China as an export platform, about three-fifths of foreign-produced output is actually sold on the domestic market. From the point-of-view of local firms, the competition added to the market from the availability of these goods is every bit as real as if the goods were imported.

Due to more and more competition in the domestic market, China's state-owned sector has been restructured. Employment has dropped about two-thirds from its peak, the excessive rate of inventory accumulation has been reduced, and profitability has increased.

Because of China's major growth, many people believe that China is a threat to the United States. These people often point to the large and growing bilateral deficit in trade with China as proof that the Chinese domestic market remains closed. They also suggest that the large buildup of official holdings of foreign exchange in China shows that the authorities are preventing an appreciation of their currency, which tends to make their products more competitive. In addition, they point out that the U.S. bilateral deficit with China is very large -- even larger than the deficit with Japan.

However, rather than being a closed economy, China has continuously grown as a major export market for American companies (Lardy, 2002). In addition, China does not have the largest surplus in its bilateral trade with the United States because its own market is closed. Rather, this has occurred because China has emerged as a major global production base for labor-intensive manufactured goods.

The biggest myth surrounding China's growth is that the current U.S.-China account deficit is China's fault (Nolan, 2004). America's deficit occurred largely because it is consuming substantially more than it is producing. As a result, it has had to borrow money from foreign countries. China has an interest in the U.S. economy, as do many other nations, because the U.S. dollar is the most important international currency. In actuality, China is only responsible for a small potion of the deterioration of the American trade balance over the past decade. It is also important to note that China does not have a large trade surplus. While many see China's trade surplus and exports as its major global impact, its imports are also rising fast, which give a major boost to global demand. Thus, we cannot blame China for the U.S. deficit.

Most of foreign direct investment in China comes from Hong Kong, Taiwan, and Korea (Nolan, 2004). As a result of rising real wages and appreciation of their domestic currencies, companies in these economies became less competitive in labor-intensive manufacturing beginning in the mid-1980s. To remain competitive, these companies began to move their production off shore. Many moved production to China, which quickly displaced the exports of other Asian economies in third-country markets, including the United States. Therefore, China presents opportunity to the U.S., while it is a threat to other Asian countries.

When it comes to employment, it is true that China is displacing some production in the United States market. However, many of the low-paying jobs in China are jobs that moved out of the U.S. many years ago. For example, production of footwear, toys, and technology-related goods largely moved out of the United States to other locations in Asia many years ago and only recently shifted to China. Thus, the American economy should have adjusted to this employment loss long before the jobs moved to China.

Many Americans fear that China will take over as the world's largest exporter, surpassing the U.S. The main reason that China's economy soared is due to foreign-invested firms, which were responsible for more than half of China's exports. However, when China started to blossom, many suddenly feared its growth. There are many reasons why China's continued economic growth is now seen as a threat rather than an opportunity. These include the perceived loss of jobs to China and the view that China is the main cause of the U.S. current deficit.