China is the most popular country in the world and occupied by most people. It has the oldest civilization with an advanced economy for two millennia. It is a socialist state with a single-party. China is among the fastest-growing industrial economy from the time reforms were put in place. As a result, its increased growth has brought in great competition with Europe and United States. Moreover, disputes between other supporter countries have also increased due to its alarming world power. More news is being read in newspapers and magazines regarding its success.
The New York Times on January 10, 2016 reported that the flagging economy of China is negatively affecting countries that have continuously sold their raw materials in China. Raw materials transported to China include metals, crops, and fuels among others. Reports indicate that China is offering them minimal prices for their products, which has contributed to a decline in their economy instead of a growth since they are dependent on them. The practice has resulted in a crush of prices around the globe and in China; it has contributed to a boom in their economy.
New York Times on January 18, 2016 had an article written by Scott Kennedy who is the Economic policy authority that China has disconnected from its role of regulating financial markets with the rest of the world. Bureaucrats in China argue that they require direct market intervention and immediate changes to normally protect their economy. The perspective is opposite to the usual global market principal. As a result, Officials in America and other international countries are urged to use diplomatic pressure to minimize risks related to the above Chinese approach.
On January 28, 2016, David Dorn placed an article describing his concern over the declining American trade with China that has depressed labor markets in America.
The article concludes that free trade between China and America ends up in net benefits in American Labor markets.
What is (or what will be) the effects of these economic events on the U.S. economy? Explain clearly and give at least three effects.
Effect of declining American trade with China
There exists U.S. trade deficit with China because imports from China are usually and continue to increase as years proceed. Example in 2015 deficit was $365.7 billion, which was an increase from 2014 record of $343 billion. U.S. exports to China were $116.2 billion while imports from China were 481.9 billion. Imports from China to United States are consumer electronics, machinery, and clothing.
United State sends its raw materials to China to be assembled at a cheaper price thus when being sent back they are regarded as imports although they originate from America (About news, 2016). As a result, China benefits by selling similar materials to America at a cheaper cost and earn higher profits. They also buy their raw materials at a cheaper price because they have low living standards which allows them to pay their workers low wages. Moreover, they have an exchange rate that is almost permanently set to be always below the price of a dollar.
Its effect on U.S economy
China affects US economy since it has to buy many treasury notes making it the biggest lender to U.S government. By November 2015, U.S debt to China was $ 1.2645 trillion which is roughly 20% public debt owned by foreign countries. China is therefore given a political advantage above U.S fiscal policy because it is in a position to call in loans (About news, 2016).
China has managed to lower interest rates. As a result, the housing boom of US has been fueled to subprime mortgage crisis. The trade deficit with China means that most U.S companies cannot compete with China unless they agree to buy their cheap goods at a lower cost or go out of business. Moreover, U.S Companies outsourcing jobs to China while others are drying up are solving U.S unemployment. U.S manufacturing jobs have declined and thus declining U.S. competitiveness globally.
About news. (2016).U.S. China Trade Deficit: Causes, Effects and solutions. Retrieved from http://useconomy.about.com/od/tradepolicy/p/us-china-trade.htm
New York Times. (2016).international trade and World market (trade disputes).The New York Times. Retrieved from http://topics.nytimes.com/top/reference/timestopics/subjects/i/international_trade_and_world_market/index.html