Joe Williams

Wnorowski

AP Economics

Feb 12, 2017

U.S. Trade Relations with China; The Short End of the Stick

In 1784, one of the first merchant ships to sail under the American flag left from New

York to Canton, China. Initial contact between the Americans and the Chinese was purely to

further economic ties and despite changing political and technological factors, trade has

remained a cornerstone in the relationship between the two countries. Unfortunately, over the

past decade or so, many are citing the U.S. Merchandise Trade Deficit with China along with the

net loss of American manufacturing jobs to call attention to how China's rapid economic growth

is spelling disaster for working class Americans. In his presidential campaign, U.S. president

Donald Trump further criticized Sino-American trade relations, claiming that Chinas entrance

into the World Trade Organization has enabled the greatest job theft in U.S. history . Trumps

election, as well as Chinas rapid emergence as an economic superpower, has called U.S. trade

policy with China into question. But overall, despite adverse affects on the domestic labor force

(and the federal debt), U.S. trade policy with China benefits the U.S. consumer because of the

lowered cost of imported goods, which results in a higher standard of living.

Sino-American relations took an interesting turn beginning in the late 1800s when the

United States pushed its Open Door Policy on European powers. This policy, which became the

basis for U.S. economic relations in East Asia, laid out the principle that all countries should

have equal access to any of the ports open to trade in China (The Editors). Essentially, it allowed

China to maintain some degree of sovereignty over the European powers with colonial interests
in the area. From here, the U.S. and China got along quite well, even fighting as allies against

the Japanese Imperialists. After the founding of the mainland People's Republic of China (PRC)

in 1949, however, the U.S. and the now-communist Chinese entered into a period of cold-war

tensions, resulting in the cessation of trade between the two powers. Relations were not opened

again until President Nixon's famous visit to the PRC in 1972.

Over the next two decades, The PRC, under the leadership of Deng Xiaoping, sought to

bring the nation closer to the west while also maintaining strong control over the Chinese people.

The result was an increasingly market-oriented economy, but a highly controversial lack of

political freedom which drew criticism from many foreign governments (Cheng). Despite this,

in order to gain access to foreign markets, China began a set of diplomatic measures, starting

with a request to join the General Agreement on Tariffs and Trade (GATT) in 1986 and

culminating with its successful admission into the World Trade Organization (WTO) in 2001.

The United States, in the decades following Nixons visit, entered into a period of healthy trade

with the PRC. This era is characterized by steady growth and mutual benefits between the two

countries as the US was free to levy and drop protective tariffs as it pleased. Leading up to and

following the PRCs admission into the WTO, however, trade relations between the two

countries would start heating up big time.

According to the Peterson Institute for International Economics, In 1985, US imports and

exports with the PRC were nearly equal, $4.2 billion imported and $3.8 exported. As of 2009,

the volume and imbalance of US merchandise trade with the PRC has increased dramatically.

The U.S. imported $310 billion and exported $70 billion (Hufbauer). This startling jump in

Chinese economic growth didnt come without its setbacks. The PRC was subjected to 15 years

of review and regulation before it was granted entry into the WTO. Certain parameters had to be
set for the Chinese Economy; WTO member nations found issue in the PRCs strict quotas, high

tariffs, poor intellectual property rights, restrictions on foreign investment, and human rights

violations. But the Chinese government was fully cooperative, and, after a number of

controversial concessions, along with a couple minor setbacks, the PRC was named a member of

the WTO. The WTO, which follows the regulations set forth by the GATT, is an international

governing body which mediates trade disputes between countries and restricts certain trade

practices it believes to be unfair such as dumping and excessive tariffs. Member nations also

receive more foreign investment because businesses in that country are viewed to be more

reliable when under the jurisdiction of the WTO.

According to World Trade Organization records, since the PRCs introduction into the

WTO, the U.S. has issued 21 complaints against the PRC, while the PRC has only issued 10

against the U.S. (Disputes). Many of the U.S.s complaints are on the subject of intellectual

property law requirements. A common complaint from US corporations is that the lack of

intellectual property requirements in China will often undermine foreign and domestic profits by

flooding the market with cheap, counterfeit goods. In 2009, 79 percent ($205 million) of the

total dollar value of goods seized by US Customs and Border Protection (CBP) for IPR

violations were from China (Hufbauer). In January 2009 The WTO panel responsible for

investigating the PRCs inability to meet standards for intellectual property law confirmed that

the PRC needed to match its laws to those specified by the GATT. China notified the panel that

it had met these specifications by March 2010 and the U.S. agreed. On the other side of the

table, Chinas complaints are often in response to U.S. anti-dumping duties that China believes to

be excessive. Anti-dumping (AD) duties are a chief method of regulating international trade that

is permitted to a certain extent under WTO regulations. Dumping occurs when firms sell
products at prices below their normal value in an attempt to capture a larger market share in

the importing country. Between 2001 and 2010, the U.S. conducted 71 AD investigations, 61 of

which resulted in the implementation of AD duties in the form of protective tariffs known as

countervailing duties. China only challenged the legitimacy of 3 of these AD duties through

WTO negotiations. In this same time span, The PRC has initiated 24 AD investigations, 22 of

which have resulted in duties, and none of which have been challenged by the U.S. (Hufbauer).

Both the intellectual property disputes and the AD disputes over help illustrate the recurring

economic conflicts that exist between the two nations. The U.S. accuses the PRC of harmful

dumping practices and insufficient patent law while the PRC criticizes the U.S. of being trigger

happy with its countervailing measures.

Despite U.S. legal action and economic tariffs, the U.S. Merchandise Trade Deficit with

China continues to grow. The deficit has rises from $10 billion in 1990 to $367 billion dollars in

2015 (Morrison). According to Wayne M. Morrison of the Congressional Research Service,

Some analysts contend that the [large trade deficit] with China indicates that the trade

relationship is somehow unbalanced, unfair, and damaging to the US economy. Others argue the

[deficit] is more of a reflection of global shifts in production as well as the emergence of

extensive and complex supply chains where China is often the final point of assembly for export

oriented multinational firms that source goods from multiple countries. In other words, the U.S.

is still buying from the same producers, its the producers that have changed their business

practices to better meet global demand. So who exactly is benefiting? The short answer, of

course, is China. Keeping in mind the definition of comparative advantage-- if the opportunity

cost of producing a certain good/service is greater for that company than for others than it has a

comparative advantage-- then it is clear that China has developed a comparative advantage over
most countries in the pacific rim region in manufacturing. To counteract Chinas dominance in

the manufacturing sector, the Obama administration worked with the governments of various

other pacific rim countries to draft the Trans Pacific Partnership (TPP), a free trade agreement

similar to NAFTA which would eliminate many barriers of trade between participating nations.

The TPP would encourage economic growth between its members through the regulation of

tariffs, increased data transfer, and stricter intellectual property laws. On a global scale, Chinas

current trade policy has resulted in overall growth for the country and its people. But how are

the average American consumers and workers affected?

For the most part, American consumers have benefited as a result of Sino-American trade

under the Obama administration. The price of everyday items has consistently dropped over

recent years, helped, also, by the effects of NAFTA. Cheap, and now always accessible, made

in China goods began flooding American markets, making the average Americans dollar go

farther and farther. According to one economists estimation, trade with China alone put $250 a

year into the pocket of every American by 2008 (Trade). Benefits from the cheaper stuff went

mostly to Americans with lower incomes, since they spend a higher portion of their paycheck on

manufactured household goods. Ironically, the same caste of uneducated blue collar workers

were harmed the most by the U.S. China trade relations.

While American consumers celebrated the massive influx in cheaper imports, laborers,

particularly from American manufacturing companies, fear that foreign goods will leave them

without work. Areas that were traditionally powerhouses in industrial production, such as the

mid-west and the south have been hit particularly hard. According to the McKinsey Global

Institute, the U.S. lost about 1/3rd of its manufacturing base between 2000 and 2010, some 6

million jobs (Berenson). Statistics such as this one are often used to back up assertions, such as
the one issued by Donald Trump in his 2016 campaign, that China has enabled the greatest job

theft in U.S. history. Only about 700,000 of those jobs, however, were lost to China, in what

TIME magazine deemed as tradable areas, such as apparel and electronics. A closer inspection

of the job theft has revealed that the rest were lost due to advances in technology, decreasing

consumer demand, and backlash from economic downturns such as the 2008 crisis. This is not

to say that the American worker has not been harmed by Chinese trade. As Paul Krugman, a

trade economist, warns, the sheer volume of trade with China and other poor countries was

probably increasing inequality. According to one 2013 model, trade with poor countries

depressed unskilled workers wages by 10% in 2011, up from 2.7% in 1979 (Trade). To

summarize, although the negative effects of Chinese-American trade are often exaggerated, they

do hold some truth because companies that outsource labor do not have to provide their workers

with the payment and treatment that domestic workers are entitled to.

President Trumps bold stance on Chinese-American trade has raised some eyebrows, but

it was undoubtedly critical in winning him many of the mid-west constituencies that typically

voted for the democratic party in the past. Trumps go-to mantra when discussing trade was that

he is in favor of fair trade not free trade. His proposals regarding China include, but are not

limited to, labeling China as a currency manipulator, using presidential power to remedy trade

disputes, and slapping a 45% tariff on Chinese imports. According to a Moody Analytics model

of Trumps proposals for tariffs against China and Mexico (which assumes the countries retaliate

proportionally with similar tariffs of their own), the U.S. would fall into a recession and four

million American workers would lose their jobs. The model further predicted that the US

economy would be 4.6% smaller and by 2019 then it would otherwise be and that unemployment

would rise to 9.5% in the same time (Berenson). Overall, its safe to assert that radical
protectionist tariffs would skyrocket the cost of imported goods, taking a chunk out of all

Americans wallets, while also harming the millions of domestic laborers who produce our

exports as a result of Chinas expected retaliatory tariffs.

In conclusion, Sino-American trade, although partially detrimental to the U.S.

manufacturing industry, helps American consumers by providing us with inexpensive imported

goods. Trumps economic policies, while providing an enticing solution for the increasing trade

deficit between China and the U.S., do not take into account the disastrous retaliatory measures

that would inevitably be taken up by Chinese policy makers, and therefore, should be avoided.

Notes

1. According to the U.S. office of the Historian, Empress of China became the first American

ship to sail from the newly independent United States to China, opening what is known today as

the Old China Trade and transporting the first official representative of the American government

to Canton.

2. A claim addressed later in the paper

3. The best-known instance being the massacre at Tiananmen Square in which hundreds of

student-protesters were killed while advocating for political and economic reform.

4. The two countries accorded each other most favored nation status following Xiaopings rise

to power in 1978

5. Sino-US relations deteriorated in the late spring and summer of 1999. The concessions

China offered in April were summarized and published electronically by the United States Trade
Representative (USTR) without Chinas consent; the summary was vehemently denied by

Chinese officials, who then proceeded to back away from prior commitments. In early May

1999, a NATO plane with an American pilot accidentally bombed the PRC embassy in Belgrade,

inciting anti-US protests and boycotts in China (Hufbauer).

6. Additionally, during the 01-09 time span the U.S. has investigated 25 instances of

countervailing and imposed 21 countervailing duties. China has only investigated 3

countervailing cases, 2 of which resulted in imposed duties.

7. To illustrate the shift in global production, Morrison pointed out that in 1990, 47% of the

U.Ss value of imported manufactured goods were from the pacific rim. By 2015 that value had

remained unchanged, at 46.8%. Meanwhile, in 1990, China accounted for 7.6% of U.S.

manufactured imports from all pacific rim countries, but by 2015, this figure had risen to 55.8%.

This dramatic shift in production does not show changing tastes of US consumers, but rather,

that many multinational corporations in the area have shifted their export-oriented manufacturing

facilities to China.

8. Following the implementation of NAFTA up until 2013, imports from Mexico grew by

about 5 times (Trade).

Sources Cited

Cheng, Dean. "The Complicated History of U.S. Relations with China." The Heritage

Foundation. Heritage Foundation, 11 Oct. 2012. Web. 13 Feb. 2017.

The Editors of Encyclopdia Britannica. "Open Door Policy." Encyclopdia Britannica.

 Encyclopdia Britannica, Inc., 26 July 2016. Web. 13 Feb. 2017.

Hufbauer, Gary Clyde, and Jared C. Woollacott. "Trade Disputes Between China and the United

States: Growing Pains so Far, Worse Ahead?" SSRN Electronic Journal (n.d.): n. pag.

Peterson Institute for International Economics, Dec. 2010. Web. Feb. 2017.

"Disputes by Country/territory." World Trade Organization. World Trade Organization, 2017.

Web. 13 Feb. 2017

Morrison, Wayne M. "China U.S. Trade Issues." (n.d.): n. pag. Congressional Research Service,

4 Jan. 2017. Web.

"Trade, at What Price?" The Economist. The Economist Newspaper, 02 Apr. 2016. Web. 13 Feb.

2017.

Berenson, Tessa. "Donald Trump Details Plan to Rewrite Global Trade Rules." Time. Time, 28

June 2016. Web. 14 Feb. 2017.