“Effects of a widening trade deficit and the necessary government policy”
“Trade Gap Widens, Fuels Calls for Tougher Stance on China” WSJ, 4/13/05, A2.
The U.S. current account (trade deficit) hit a monthly high rising 4.3% in February to $61.04 billion. The increased deficit reflects the rising costs of imported oil and increased consumer demand for foreign goods. Imports rose by $2.58 billion from January to February as Exports remained constant.
The widening trade deficit over the past two years has economists concerned about the longevity of attracting foreign capital. This is especially true between China and the U.S. where the deficit has increased 50% from 2004, making it the largest deficit of any single country.
As a result, there is pressure from industry officials to consider stronger trade guidelines to correct for this widening deficit. The U.S. cites the fixed yuan-dollar exchange rate for keeping China’s currency relatively weak and therefore encouraging the consumption of Chinese goods in world markets.
The U.S. government is considering a 27.5% tariff on all Chinese products entering the U.S. if Beijing refuses to raise the value of their currency. This purpose of this tariff would be to offset China’s currency advantage, but critics argue it may increase the price of Chinese-made goods more than a currency adjustment.
To assess the validity the proposed policies for this scenario, we will analyze this issue using intermediate economic theory as a framework.
The current account is of great concern to U.S. policymakers as a long-run surplus or deficit may have undesirable effects on the national welfare. Large imbalances can also create political pressures for increased trade restrictions, as is the case in our study. Therefore, it is important to determine how monetary and fiscal policies will affect the current account with respect to output and the exchange rate. We can illustrate the relationship between the exchange rate, output, and the current account in terms of the AA-DD framework.
The XX curve shows the combinations of the exchange rate and output where the current account balance would be equal to some desired level (equilibrium). The XX schedule is upward sloping because, ceteris paribus, an increase in output encourages spending on imports and worsens the current account if it is not accompanied by currency depreciation. The point labeled A, is where the graph is in equilibrium and the economy is at full employment (Yf) with a given exchange rate, Eo.
Meade (1988) stated that, because of the exchange rate rapid decline so much since early 1985 in the US and because the monthly trade statistics has been examined so thoroughly for any sign of a turnaround in the nominal trade balance, the J-curve phenomenon has received much attention. The statistics often implies that the negative effect of depreciation is reflected in the J-curve as the continuation of nominal trade deficit. Between early 1985 and 1988, the exchange value of US dollar in terms of currencies of other countries, registered a sizeable depreciation. The deficits recorded in the trade account were mirrored in the current account deficit. Meade depicted the significance of the exchange rate to the trade account as well as current account through the use of the J-curve highlighting that the phenomenon is used as a long-term goal to curb the deficits, however in the short-run, depreciation will increase the nominal deficits accumulated by a country.
In a protectionist position, the government is aiming to ensure American businesses and at the same time decrease the amount of sales of foreign business. The fastest method for accomplishing this task is to increase tariffs, as in taxes on foreign goods coming into the country.... ... middle of paper ... ...
In 2001 China entered the WTO it has made major stride in the world economy especially with trade agreements with the biggest capitalist economy and the biggest GDP and most developed country in the world the United States of America which has nearly 2.3 trillion of exported goods and service in 2013 (President, n.d.) When China entered in the WTO it had become the sixth largest economy and the largest market trade and was slightly ahead of Italy and just behind France. “China is third largest trading partner with the U.S and its trade surplus with the U.S. has increased to $201 billion around 2005 and by 2014 the total China-U.S. trade deals was 591 billion”. (Morrison, 2015) It had a global current account of $160 billion around 2005 (Hufbauer, Wong, & Sheth, 2006). As of 2015 “China is the U. S’s second largest trading company and the third largest export company and its biggest source of import”. (Morrison, 2015) Sales from a foreign affiliated U.S. firms in China totaled at 364 billion by 2013. (Morrison, 2015). What is also amazing is that China has the biggest U.S. treasury bonds and that keeps U.S interest rate low. Between 2010 to 2014 General Motor sold more cars in the Chine’s market than in the U.S. market and many U.S. firms participate in Chinese market to stay globally competitive. (Morrison, 2015). This kind of
The picture in China during the recession had been quite different than in the U.S., as demand for steel to build cars, bridges, and appliances helped prop up global steel prices. However, demand in China has slowed and brought fears of China exporting ...
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
Foreign direct investment has played a vital role in the transformation of the Chinese economy in China, with value contracted increasing from US$ 52.1 billion (1998) to US$ 115.1 billion (2003).
In 1978, China was positioned 32nd on the planet in export volume, yet it had multiplied its reality exchange and got thirteenth biggest exporter in 1989. Between 1978 and 1990, the normal yearly rate of exchange extension was over 15 percent,[11] and a high rate of development proceeded for the one decade from now. In 1978 its exported on the in the world of the overall industry was insignificant, in 1998 regardless it had short of what 2%, however by 2010, it had a world piece of the overall industry of 10.4% as stated by the World Trade Organization (WTO), with stock fare offers of more than $1.5 trillion, the most astounding in the world.
When America's cotton is sent to China, it is made into T-shirts in the sweatshops of China by laborers working 12-hour days and being paid subsistence wages. When the finished T-shirts re-enter the U.S., they are protected by the government through subsidies, tariffs, taxes, and protectionist policies that ensure that these foreign products will not provide too much competition to American-made shirts. Government regulations control how many T-shirt can be imported from various countrie...
The massive increase in the Chinese trading relations was fueled by the United States in the year 1979 through the normal trade relations between the two countries. In addition, the Chinese non-concession to the World Trade Organization (WTO) in the year 2001 also facilitated its trading activities with different countries including the United States (Kaplan, 57). However, trading relations with the Chinese have been uneasy resulting from the massive trade imbalances in the recent past, which grows exponentially. The protectionist policies of the United States especially in Washington and Beijing have been putting pressure on the Chinese to revalue their currency as well as protecting it from counterfeits, which may be of adverse effects to the trading relations. This paper gives a comprehensive discussion on the foreign trade relations with china. It further gives an elaborate discussion on the impacts of foreign tr...
The current trade imbalance is caused in large part by intrinsic features of China's labor market and consumer base. The vast majority of China's 1.3 billion people still live in rural areas. China has, by some estimates, a surplus rural labor force of 120 million people, many of whom migrate to industrial centers to look for factory work, and drive down wages. As long as wages are low, the United States will continue to gobble up products made in China, while Chinese consumers will prefer to buy cheaper, homespun alternatives to American products. The rise in trade deficit with China has come at a cost to jobs in the United States, accordin...
...es currently does possess an enormous trade deficit, but the importance of this problem and the best means of solving it is a sharply debated issue. Clearly, while a return to protectionist policy would have some positive effects in the short run, it ultimately would undue the enormous growth that free international trade has caused for the US economy. The more moderate approach, of increasing domestic capital, reducing reliance upon foreign money and goods, and reducing government spending, deals with the situation much more effectively. A deficit is often times natural, especially in a wealthy country with a very strong economy, such as the US. Using these techniques, the negative aspects of the deficit can be overcome, while still ensuring the efficiency and affectivity of a liberal international trade system.
In 1996, the US current account and emerging market plus developing country current account were each about zero. In 2008, US current account was in deficit by $ 600 bn, the emerging market/developing country current account in surplus by $ 900 bn. (sect. 1.1)
Embracing the concept of free trade means that a government does not influence the trade by imposing sanctions but rather has a laissez-faire approach that allows the international market to decide which product has the comparative advantage. The global economy runs on this assumption but not all “play” by the same rules. The United States has limited sanctions imposed on free trade, allowing the free market to operate across the world. The United States’ approach to free trade is much like our approach to the US Olympic Team. Our athletes are unpaid volunteers that often fund their Olympic quest with sponsorships. As our metal count often shows, you do not always “win” ...
China has also expanded their trading industries with countries such as South Korea, Japan, Taiwan, ASEAN, India, Russia and Hong Kong. This has not satisfied the Chinese greed for income as they also export and import goods to American countries, name...
Daily in the USA about 38 million banknotes of various face value for total amount about 541 million dollars are issued (Facts about USA money).Dollars involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off of competitors of the USA in foreign markets. At the same time import to the USA owing to effect of a rise in prices restrains. Thus, for the USA changes in the exchange rate of dollar anyway bring benefits and advantages.Reduction of leading positions of the USA in world economy is assisted by the international role of dollar which remains the main reserve and settlement means in world monetary system. Foreign currency reserves of the central banks of other countries for 61% consist of dollars, nearly 2/3 calculations in world trade are carried out in dollars; the dollar serves as a measure of value of many important goods (for example: oil) in the world market; in dollars 3/4 international bank crediting is made (Aleksandr Popov). Changes in the exchange rate of dollar involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off...