International Trade

M5: Assignment 1: LASA 2: International Trade

        Looking at table 1 below, over the last five years, the annual trade balance between the U.S. and China has steadily become more of a deficit (cencus.gov, 2016).  The last annual trade balance was a deficit of $-367,172.90.  So far, just in the four months given of 2016, the trade balance is at $-102,252.10.  That is just shy of the 4 month total in 2015; which was $-109,987.40 (census.gov, 2016).  While the 2013 data shows a substantial annual percentage increase for exports to China and a small annual percentage increase on imports from China, the dollar value tells a different story.  The value of exports to China increased only $11.4 billion while the value of imports increased $14.8 billion. (a) (Scott, 2014)  

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        When the price of domestic goods rise, the demand for a cheaper alternative import increases.  Growing U.S. trade deficits with China–a much poorer economy– has assisted in reducing hourly wages or employment of many American workers.  Because China keeps their pricing so low, it is hard for U.S. companies to compete.  Products designed in the U.S. but assembled in China, tend to cost significantly less than they would being assembled in the U.S.  Let’s use the iPhone5 for example, it was designed in California but assembled in China.  According to marketplace.org (2014), having moved all production of the iPhone5 to the U.S. would have increased the manufacturing cost from $190 per phone to $600 per phone (nearly the retail price).  This production cost increase would have potentially increased the retail price of the iPhone5 to $2,000.  U.S. consumers, regardless of where a product is produced, appreciate being able to get more for their money.  Even if it means U.S. jobs, mainly manufacturing, will be sacrificed for that low cost.  Josh Bivens shows that in 2011, trade with China alone, caused an average annual income loss of $564 for a non-college-educated full-time workers (Bivens, 2013).  Though there may have been an income loss for those working in manufacturing, according to the Bureau of Economic Analysis (2015), from the fourth quarter of 2011 to the first quarter of 2015 the Real Gross Domestic Income increased at an average annual rate of 2.3 percent.  While in the same time period the Real Gross Domestic Product increased at an annual rate of 2.0%.  This may be in relation to the earlier stated percentage increase in exports and lower increase in imports.  

So, how does China keep prices so low? According to useconomy.about.com(a) (updated, 2016), most economist agree that China is able to keep their manufacturing prices low due to their lower standard of living, allowing for a lower minimum wage and a partially set exchange rate, keeping it lower than the dollar.  Robert Scott (b) (2014) states that China’s currency manipulating has strongly correlated with the growth of their trade and current account surpluses with the U.S.  Scott also states that “China has built an export based economy…” “From a macroeconomic perspective, China has developed bloated manufacturing and trade goods sectors and suppressed domestic consumption.  As a result the structure of China’s economy is distorted, imbalanced, and unsustainable.”  Though Scott may have this opinion, I see it as an extremely large developing country that grew incredibly quickly and is now leveling out.  Wayne Morrison, a specialist in Asian Trade and Finance say that from 1979 to 2014 China’s Real Gross Domestic Product grew at an average rate of nearly 10% each year. (2015)