Effects of U.S.-China Positive effects & conclusion.

Positive effects of large surpluses on the Chinese economy include increased productivity and employment levels. Through increased exports, entities residing in China would seek additional labor to meet expanded demand thus improving the country’s employment level and output. Large surplus however affects Chinese economy adversely, mainly out of an undervalued currency that seeks to promote exports and overdependence on FDI. Undervalued currency increases the production cost for entities that rely on imported inputs while reliance on exports and FDI makes the Chinese economy highly susceptible to global economic slowdowns (Morrison & Labonte, 2010). Such a scenario is for instance evident in the period between 2008 and 2009 when the global financial crisis reduced the Chinese trade balance with the U.S. greatly (see figure 2). An undervalued currency also limits the effectiveness of the monetary policy in safeguarding against inflationary trend. With an undervalued currency, increase in interest rates to control inflation (a contractionary monetary policy) would for instance encourage a flow of foreign currency into China thus spurring investment in sectors such as steel and real estate,  increasing rather than lowering inflation (Morrison & Labonte, 2010).

Conclusion

Trade imbalances pose various economic challenges to the economies of the respective countries. This paper evaluates the trade balance between China and the U.S. from 2006 to 2010 and examines the ramifications of such trade balance. The trade between China and the U.S. from 2006 to 2010 has been largely imbalanced with China enjoying high trade surpluses while the U.S. had large deficits throughout the period. The ramifications of such a situation to the U.S economy include depressed employment levels, increased pressure on wage levels and increased vulnerability to economic crises. With respect to China, the large surplus makes its economy susceptible to global economic slowdown. Additionally, an undervalued Chinese currency that seeks to promote exports limits the extent to which the government can use monetary policy to curtail inflation and increases the costs of production for entities deriving their inputs from imports.

References

Astley, M., Giese, J., Hume, M. & Kubelec, C. (2009). Global imbalances and the financial crisis. Bank of England Quarterly Bulletin, Q3, 178 – 190.

Elwell, C. K., Labonte, M. & Morrison, W. M. (2007). Is China a threat to the U.S. economy? Congressional Research Service, January 23 (RL33604), 1-59.

Export.gov (2011). Product profiles of U.S. Merchandise trade with a selected market. Retrieved from http://www.export.gov/tradedata/index.asp

Kenc, T. & Dibooglu, S. (2010). The 2007-2009 financial crisis, global imbalances and capital flows: implications for reform.” Economics Systems 34(1), 3-21. doi:10.1016/j.ecosys.2009.11.003

Morrison, W. M. (2011). China – U.S. trade issues. Congressional Research Report, August 4 (RL33536),1-36.

Morrison, W. M. & Labonte, M. (2010). China’s currency: An analysis of the economic issues. Congressional Research Service, October 1 (RS21625), 1-33.

 

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