The US and China: a love-hate relationship

18 10 2011


 by Paula Bianca Lapuz

The earth was made by God and the rest was made in China. This is perhaps the oldest running joke regarding the world’s largest factory.

Indeed, jokes bear some form of truth. China has the largest competitive advantage over cheap labor and since it has slowly opened up its market to the world four decades ago, multinationals have flocked to its sweatshops to reduce their manufacturing costs.

Since 2001, bilateral trade has grown between China and the US, which some critics claim is partly to blame for the 1998 crisis. Of course, the crisis was largely due to the collapse of the housing market, but the influx of cheap products from the mighty China also put a lot of local businesses out of operation. A report by the Trade and Manufacturing Policy Research stated that at least 2.8 million jobs were lost since 2001 (Mulvey 2011).

Analysts point to the manipulated Chinese currency, the yuan, for the cheap products. They say that the yuan is 25% to 30% undervalued against the US dollar which makes the products of the Chinese 25% to 30% cheaper than US made products (FlorCruz 2011).

A few days ago, United States Senators pushed for legislation that intend to discipline countries intentionally undervaluing their currency to gain unfair trade advantage over the US. Analysts see this as a measure to arrest the huge trade deficit of the US with China which currently stands at $273.1 billion as of February 2011 (Wearden 2011).

Nevertheless, many are still wary of this move. House Speaker John Boehner stated in a CNN report that he is not in favor of the said proposition. Moreover, Boehner said that messing with the yuan was “well beyond what the Congress ought to be doing (FlorCruz 2011).”

Miles and oceans away, issues on unemployment and rising labor costs are surfacing in China.

Economic progress also means a growing population of university graduates looking for better jobs other than those in the factories (BBC 2011). And with labor costs starting to increase, jobs are predicted to head back to the US sooner (Marsh 2011).

But some analysts feel that this could very well be just wishful thinking. Patrick Chovanec, Associate Professor at Tsinghua University’s School of Economics and Management told CCN that “a stronger yuan is not going to bring back jobs in labor-intensive, low-tech industries where the US has no real competitive advantage” and that even before those jobs reach the US it will be headed toward countries like Vietnam and Bangladesh (FlorCruz 2011).

Analysis

Several factors must be considered in this picture.

First, the fact remains that China is still the biggest holder of US Treasuries. Of course, China has to put its money somewhere and as Fareed Zacharia would put it, where else is the safest depository of real cash, but the US Treasuries? Never in history has the US government defaulted on any loan.

Second, certainly, the US cannot win its competition against China by sanctioning the latter for undervaluing the yuan. China, unlike the US, can and is doing business with everyone, even with the likes of Pakistan, Myanmar, and other countries with which the US has issues. China’s growing political and economic power is too strong to suppress.

Third, as stated by House Speaker Boehner, forcing China to undervalue the yuan is probably out of the US Congress’s hands. At the time when the yen was suspected of being undervalued against the US dollar, key stakeholders of leading economies and major financial institutions signed an agreement (see the Plaza Accord) to force the Japanese government to adjust the yen to its real value.

Fourth, this goes against the mantra of the US on liberalization. Clearly, this is a sign of protectionism, which is probably good depending on which perspective one uses, but of course is still inconsistent with the US neo-liberal policy, and which will most likely upset the World Trade Organization.

This is also perhaps a lesson learned the hard way for the US. It remains fundamentally vital to secure the local economy first. It is rather interesting to see the US rattled by China, when in fact, it is the US that has forced other countries to abandon their protectionist policies in the name of globalization and free trade.

This is a US-China love-hate relationship. Clearly, the US cannot discipline China. Not when China is striking deals with other significant global political players, not when China sets its eye on space explorations, not when the China’s growth is unstoppable. China may experience a bit of problems here and there, but surely, with its huge resources, it will stay as a global power whether the US likes it or not.

It is also true that jobs, if lost in China, will not head back to the US. What the US needs to do beyond worrying about China, is to encourage further innovation in its industries, to which CNN’s Fareed Zacharia had also agreed (CNN 2011).

Works Cited

BBC. BBC News Asia-Pacific. July 19, 2011. http://www.bbc.co.uk/news/world-asia-pacific-14192337 (accessed October 14, 2011).

CNN. CNN Press Room. June 05, 2011. http://cnnpressroom.blogs.cnn.com/2011/06/05/fareed-zakaria-talks-to-america%E2%80%99s-top-innovators-about-the-best-way-forward-in-new-primetime-special/ (accessed October 14, 2011).

FlorCruz, Jaime. CNN Business. October 11, 2011. http://edition.cnn.com/2011/10/11/business/china-us-currency-dispute/index.html?iref=allsearch (accessed October 14, 2011).

Marsh, Peter. CNN Business. October 07, 2011. http://edition.cnn.com/2011/10/06/business/china-us-labor/index.html (accessed October 14, 2011).

Mulvey, Jeanette. Business News Daily/News and Trends. September 20, 2011. http://www.businessnewsdaily.com/china-trade-deficit-1800/ (accessed October 14, 2011).

Wearden, Graeme. The Guardian News/US Economy. February 11, 2011. http://www.guardian.co.uk/business/2011/feb/11/us-chinese-trade-gap-grows (accessed October 14, 2011).


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