Trade Imbalance between China and the United States

The problem of international economic relations is of great importance in the age of globalization. The two global economies of China and America play the main role in World Trade Organization (WTO). The leaders of the two states in their public speeches focus on the potential areas of bilateral cooperation, along with the existence of a wide range of common interests of the global and regional nature. The publication of official statistics on the US trade is often accompanied by an expression of concern about the size of the US trade deficit in terms of the trade with China. The American deficiency in the trade with China is one of the fundamental logical inconsistencies in the relations between these two states. Nations cannot concur on the span of the exchange deficiency. Nevertheless, the symbiosis of the two economies in the most general terms can be presented as follows. American corporations have been transferring their production to China for many years, actively applying the Chinese “open door” policy. Despite the growing imbalance in trade between the US and China, the benefits of foreign trade cooperation with China for the United States in the long term are significant being associated with the significant impact of the growing trade with China on the US economy.

Transformation of the international system in the beginning of the 21st century has an all-embracing and profound nature. In terms of the international system, the role played by the new centers of influence and their location is increasing. Non-traditional security problems tend to deepen and multiply, and the solution to them requires the consolidation of efforts of the entire world community. The interdependence among the states is growing, and the global financial institutions created after the end of the World War II are being reformed and monopolistically controlled by Western countries with the determining influence of the United States.

At the same time, the rise of China is the principal factor shaping the geopolitical and geo-economic landscape of the 21st century. Its complex national power is rapidly strengthening, while the geography of national interests is expanding, and international influence is gradually increasing. China’s interests are now focused not only on domestic economic development and participation in the affairs of East Asia, but with the varying degrees of intensity are projected to almost all regions in the world. Moreover, the foreign policy of this largest East Asian state is reaching a qualitatively new level. The tendency of changing the nature of the country’s foreign policy towards the transition to positioning itself as a global power is also traced. The Chinese leadership is taking active steps in its participation in shaping the international agenda, creating new mechanisms and institutions for global governance. With the support of several other centers of influence, Beijing is stepping up the pressure to review the existing rules of decision-making in the global and financial institutions controlled by the West and the US: the IMF, the World Bank, and the WTO (Geng, Tian, Sarkis, & Ulgiati, 2017).

The rise of China is one of the most remarkable phenomena on the international scene having a strong impact on contemporary international political and economic processes. Moreover, the rise of China repeats the precedent that has repeatedly taken place in the world’s history, when the rapidly expanding power of a potential superpower challenged the already recognized and entrenched state in its role as the world leader. Most often, this precedent ended with a tough clash of interests of these states, and sometimes with a large-scale armed conflict. In this regard, the relations that are developed by China and the United States acquire a special meaning, distinct from any other modern interstate relations, and the study on this matter is of great theoretical and practical importance.

General Characteristics of the US-China Trade Relations

The official assessment of the current US-China relations, provided by the top leaders of the United States and China during the bilateral meetings, is usually conducted in an optimistic, positive tone. The leaders of the two states in their public speeches focus on potential areas of bilateral cooperation, along with the presence of a wide range of common interests of the global and regional nature, and the willingness of both states to develop partnership relations. However, the official rhetoric of the top leadership of the two states cannot hide the serious contradictions inherent to the US-China relations, systematically manifested and leading to tensions and clashes of interests in the interaction of the two states (Groenewold & He, 2007). The fundamental reasons for these contradictions are the fundamental difference between the political regimes, ideologies, value systems and models of the economic development of the two countries, their disposition as a superpower (a state-global leader) and a potential superpower (a towering state) as well as the lack of strategic trust between them.

Over the past 30 years, relations between China and the United States have gone through a difficult stage. However, in general, the relations between the two countries are moving ahead, despite so many challenges. In this regard, the high interdependence of the economies of the two countries is of strategic importance, and such interdependence is getting stronger; the parties are practically inseparable from each other. This is an indication of a strong link between the two states.

In regard to the above stages, the following main points can be identified. The establishment of diplomatic relations between China and the United States was not by chance and could be explained by the introduction of the reform and opening-up policy by China. During the development of the reform and opening-up policy plan, the normalization of relations with the US was included in this plan as an important point. The establishment of diplomatic relations between China and the United States has created a favorable climate for China, which is very important. In addition, it is also important for China’s reformation and opening up.” In turn, the establishment of diplomatic relations between China and the United States is also of great importance for the United States.

The second stage can be characterized as the period of the restoration and normalization of the US-China relations. In the 1990s, relations between China and the United States were marked with sharp changes in the international climate. After the collapse of the Soviet Union, the “bipolar” world has changed. The US became the only superpower. It was imperative to withdraw the relationship between China and the United States from the current conditions, so they decided to conduct negotiations on China’s accession to the WTO as soon as possible.

The third stage is the comprehensive development of constructive relations between China and the United States. In this regard, China and the United States should develop a constructive partnership. Upon visiting China, the US Secretary of State mentioned that China was a global partner of the United States, and that it was a responsible stakeholder in the international community. In 2003, the trade turnover between China and the United States increased and amounted to 126.3 billion dollars, an increase of 30% compared to the previous year, while China’s exports to the US amounting to 92.5 billion dollars increased by 32.1% in the same period (Thorbecke, 2015). The share of trade with China is 11% of the total trade turnover of the United States, while the share of trade with the United States is 14% of China’s total trade. According to Geng, et al. (2017), in order to overcome this productivity imbalance, efforts are needed to improve the quality of knowledge, skills and technology, the creativity and R&D capacity of the labor force in China. These relations show that China and the United States are interdependent. In regard to China’s exports to the United States, the main exported commodities include electric machines and equipment, which account for 42.6% of China’s total exports to the US, or $39.4 billion marking an increase of 50.4%. The next most important group of exported products is consumer goods ($ 12 billion, + 14.3%), which moved up two positions in the commodity nomenclature. China’s imports from the US mainly include such products as electric machines and equipment, which account for 33.6% or $ 11.4 billion and chemical production ($ 4.4 billion + 29.4%). It is imperative to comprehend the main drivers of the China-US reciprocal trade imbalances, described by FDI inflows. Moreover, it is important to understand the existing substantial dependence on preparing contributions, by inquiring about the essential connection between America’s immediate interests in China, and the trade surplus (Wang, 2013).

A significant increase in the growth of trade between the two countries, according to Chinese economists, is explained by the need to overcome certain difficulties that the USA experienced in the previous years. China continues to increase an already significant surplus despite measures taken by the US government, which hampered the widespread penetration of cheap Chinese goods into the US market, as well as restrictions imposed by the US administration on providing advanced US technologies to China. These are the main problems in the US-China trade and economic relations.

Historical Excursion of Economic Relations between the USA and China

Since the first arrival of the American president to China in 1972, when Richard Nixon initiated the secret “quasi-alliance” of America and China to contain the USSR, the world arena has changed beyond recognition. The world has ceased to be bipolar, and the PRC, being the second economy after the US, has turned into a powerful global player, claiming for the position of a leader. At present, these ambitions cannot be ignored. Today there is no doubt that America sees China as a real competitor (Wang, 2013). In 2009, in Washington, there was even expressed the idea to ??divide responsibility for the sake of world regulation in the format of “group of two” (G2). The idea, however, did not find support on behalf of the Chinese leadership: the CPC continues to seek a balance point between the restrained policy of the “developing state” (the way it officially calls itself) and the active offensive policy of the “rising superpower”. The future of the US-China relations depends on what strategy the CPC chooses to solve this problem.

In the Congress of the CPC, much was said about the future role of the “new” China in the system of international relations. The CPC’s desire to reach the world power level through the transformation of its model of economic development and modernization of its armed forces is increasingly evident. Among the key factors that determine the approach of Beijing to foreign policy, the nature of the political regime of the Celestial Empire becomes especially important. Given the social and demographic challenges faced by the Chinese leadership, Beijing faces the task of strengthening the legitimacy of power and justifying the model of “building socialism with Chinese characteristics.” The idea of ??”hostility” of the outside world towards China complements its economic and military-strategic success as a tool to increase the legitimacy of power.

Distrust of the international environment was gradually shaped under the influence of the long-term negative experience of the relations of imperial China with the great naval powers of the XIX century, namely Great Britain, the USA, and France. Today, Beijing defines the “four rings of dangers” regarding the issue of Chinese statehood having external origins. The first ring includes the threats that undermine the political stability and integrity of the state, which include the ideas of spreading democracy and developing civil society as the main “tools” of American foreign policy.

The second ring refers to China’s neighbors. Relations with the neighbors are complicated by the unsettled territorial and border issues on land and at sea. In the light of China’s recent border conflicts with Japan, Vietnam, and the Philippines, it can be concluded that China feels “trapped” in this ring and will seek to satisfy its interests. This is followed by the threats and dangers that await Chinese foreign policy at the regional level. In this regard, the policy of the United States, which has the greatest naval capabilities, evokes a special concern in regard to Beijing, which continues to view the APR as a key region from the point of view of national security and seeks to preserve the status quo on that territory.

Finally, the last ring of dangers and threats covers the challenges at the global level, to which China has started paying increasing attention in its foreign policy priorities since the 1990s. At the same time, in all four components of the threat structure, according to Chinese experts, the most significant factor is the American factor, which allows formulating a thesis regarding the eventual intensification of conflict in bilateral relations.

US-China Trade Imbalance

The American deficiency in the exchange with China is one of the fundamental logical inconsistencies in respective relations. Nations cannot concur on the span of the exchange deficiency. According to the official US data, the Chinese surplus in trade with the United States amounted to $ 315.1 billion in 2012. However, according to Chinese statistics, the surplus in trade with the United States in 2012 was only $ 224.1 billion, and this figure is by 91 billion less than the American statistics. The main mismatch in the trade statistics of the two countries is due to the difference in data on exports from China to the United States (Morrison, & Library of Congress, 2017).

The question why China’s official statistics regularly gives a lower valuation than the official US trade statistics has long been a matter of debate. There are several reasons for these statistical differences identified in the scientific literature:

1) Definition of the basic terms of delivery

In its official statistics, China estimates exports based on FOB and imports based on CIF. The same statistics of the US measures exports based on the FAC, and imports due to customs valuation. Accordingly, the official US exchange measurements give a lower valuation of the US exports to China and imports from China than the official Chinese insights. To make a more accurate direct comparison, the trade statistics of both countries should use the same method of determining the cost, for example, as is customary in the international practice that is to measure exports based on FOB, and evaluate imports based on CIF.

2) Determination of the state of products’ origin

Goods traded from a third nation (mostly Hong Kong and Taiwan) from the Chinese perspective are considered as merchandise from this nation, while in the United States imports are dictated by the nation of the merchandise at its starting point, and fares – by the goal nation. Therefore, the goods of Chinese origin, shipped to third countries, are regarded by the US statistics as exports to the US from China.

3) Contrasts in the valuation of direct exchange

According to the “Joint China-U.S. Investigations of Discrepancies”, some of the distinctions in the information on the US imports from the PRC and Chinese fares to the US are explained by the changes in sending out costs from China and import costs in the US for products transported directly from one state to the other. Part of these differences is associated with the transfer of property during the delivery, which leads to a price premium when the owner changes (Xu, 2012).

The publication of official statistics on the US trade is often accompanied by an expression of concern about the size of the US trade deficit in terms of the trade with China. According to the official US data, the trade deficit in bilateral trade with the PRC is more than 4 times higher than the deficit in trade with Japan, which ranks second in its volume, and amounts to more than the amount of the first seven deficits with other trading partners. China, however, does not consider the US statistics to be accurate. In 2007, a representative of the Chinese Ministry of Foreign Affairs mentioned that the imbalance is due to the existing differences in statistical methods applied by both states. For the purpose of data comparability, it is necessary to combine the methods used for collecting statistical data.

New Approaches to Assessing the Prospects for the Development of Economic Relations between the PRC and the USA

China has become one of the great powers, without which it is already impossible to imagine the world economy and politics. Moreover, this power is one of the main sources of problems for the US: a state with a non-market economy and the ruling Communist Party is a direct challenge for the United States. However, the United States is the largest economic power, whose economic interests take precedence over political aspirations. At present, the high level of development of trade and economic relations is one of the foundations for the stability of the US-China relations (Arslan, K?l?n?, & Turhan, 2015).

Moreover, the relationship between the US and China, despite the abundant political rhetoric, is economically considered so harmonious that many experts talk about the economic symbiosis of these two countries. Thus, the interconnectedness and interdependence of the US and China give rise to a version called the “two-headed dragon.” The main idea of ??this version is that in the 21st century there will be two superpowers in the world: the USA and the PRC. The main geopolitical factors that determine the world’s future will be G2 – China and America, and not the G20 – the “Big Twenty” or the “Group of 20” (Dong, & Whalley, 2012).

The symbiosis of the two economies, in the most general terms, can be defined as follows. American corporations have been transferring their production to China for many years, actively using the Chinese “open door” policy. The benefits for the corporations are obvious – the Chinese labor force costs ten, twenty, or even fifty times cheaper than the actual US workforce, so that labor costs and the production costs (which can reach 50% for individual goods) are sharply decreased. The fall in prime cost entails a rise in profits, so the profitability of corporations that have transferred their production to China goes beyond all reasonable limits. Moreover, the financial world crisis served as an impetus for this process to acquire a global meaning.

At the same time, it is necessary to note the additional effect that the entire US economy receives from the transfer of production to China that is the stability of domestic prices. Inflation is held at a low level, despite the various kinds of monetary pumping that the US Federal Reserve has been producing. In the US market, only those commodities that are not produced in China – housing and oil continue to become more expensive. The rest of commodities is not expensive; this is the main positive effect of this symbiosis. The transfer of American capacities to China contributed to the creation of new jobs there, which, in the conditions of a huge number of healthy populations, were extremely welcome. Millions of people got jobs and, most importantly, saw a significant increase in incomes. In addition, the “high” income in enterprises with foreign capital had a multiplier effect on the rest of the Chinese economy, not being directly connected with foreign markets. Despite receiving wages in foreign enterprises, the Chinese workers spend their salaries on purchasing goods and services produced domestically, and accordingly create a “secondary” demand, through which the domestic production sector develops.

However, it is impossible to carry out such a massive transfer of industry from one country to another without certain challenging consequences. The origins of the Sino-American imbalance consist in the fact that enterprises located on the territory of the People’s Republic of China export more goods to America than enterprises in the United States exporting goods to China. On the other hand, China is not yet prosperous enough to make a decent demand for what America can supply there. In other words, the US exports are inadequate in China, which makes the trade deficit between the US and China continuous. However, according to experts, the situation is likely to change in the nearest future. As China is getting richer, it will be more accessible to the goods sold by America. This will further help to find a new balance. The configuration will soon change, even though at the moment both countries are going through a dead, transitional stage.

The mutual dependence of the US and China is so strong that any embarrassing movement of one of the participants in this tandem can undermine not only the partner’s economy but also the global economy as a whole. In this regard, two aspects are noteworthy. First, the United States is considered the main driving force of the world financial stabilization. It is believed that in the short term it is Washington and not the collective actions of other players that would primarily influence the normalization of the global financial markets. Second, China and the United States apparently have already reached certain agreements on the “division of spheres of global influence” and a gradual transition from a monolithic dollar system of the world economy to a multi-currency system, with its own “zones of influence.” The “zone of influence” of the PRC will not only include Southeast Asia but may also cover Latin America, which in the near future can be the subject of a certain bargaining between Beijing and Washington. It should be noted that at present the approach of “symbiotic leadership” embodied in the concept of “double-headed dragon” acquires more and more adherents.

The current global crisis only aggravated the confrontation between the two economic superpowers. America’s reproaches to China have increased substantially because its large volume of deposits has contributed to excessive level of consumption in the US and the formation of a price bubble in the asset market. More and more American experts claim that the big active balance of the Asian countries led by China became the true source of the present-day financial crisis.

China, in turn, defends itself against US accusations, and claims that the source of the huge negative trade balance of the US is in the structure of its own economy and the macroeconomic policy of the state. In addition, the demand for new economic entities in the Asian region necessary for building up international reserves and domestic deposits is a measure aimed to successfully counteract the crisis, based on the bitter experience of the Asian financial crisis. These measures can also be considered as written out by the International Monetary Fund, whose work is mainly controlled by the US government, being a “recipe” for Asian countries under the conditions of the Asian financial crisis. Currently, according to some American experts, the same proposals have become a source of financial crisis. These arguments are clearly contradictory.

The main causes of the crisis, according to the Chinese version, consist in the consumption model, economic policy miscalculations, financial control inefficiencies, the malfunctioning of the US financial institutions, as well as the US and world economic structures, which are assumed by the IMF, World Bank and WTO and which are controlled by the United States. China believes that the previous international economic order allowed a small number of developed countries to control the mechanism of regulating the international economy in terms of their own interests, hindering the development of the rest of the world.

Analysts note that the tension in the trade relations between the US and China is growing increasingly as the crisis uncovers. However, the range of measures and the degree of pressure that the new US President can use is very limited. If China starts selling treasury notes, this could lead to a much more aggressive clash of interests, than the current crisis, up to the collapse of the dollar, which can cause a recession in the US and the other world states. The main factor holding back this confrontation is that both countries can lose too much. However, there is an opinion that the Chinese are already preparing the grounds for a gradual replacement of the US dollar as a world currency, at least in the Asian region.

Conclusion

At present, international trade is the most developed form of international economic relations, being one of the important factors of the globalization of the world economy. International trade is directly linked to the world market, which is a system of stable commodity-money relations between the countries and their economic agents, involving participation in the international division of labor. The world market as an economic category differs from the national market by the geographical location, subjects of market relations and terms of the product delivery.

Despite the growing imbalance in trade between the US and China, the benefits of foreign trade cooperation with China for the United States in the long term are significant being associated with the complex impact of growing trade with China on the US economy. It takes place in a number of ways, including trade balance, price fluctuations, as well as employment and labor productivity. In a broad global context, all these consequences for the US economy cannot be adequately assessed without taking into account the processes of interaction between the United States and China in terms of the world economy as a whole and with its individual subjects in the context of increasing interdependence and complication of interrelations between the world countries, along with the formation of transnational reproductive systems.

Unlike exporting powers such as the United States, China is mainly engaged in the export of electromechanical and high-tech products, while many transnational companies are engaged in the production processes at enterprises created with the use of their investments in China. At the same time, American companies pay more attention to technologies, brands, quality, services and other non-price factors, which give products a higher added value. Without a doubt, China can be considered a big trading country, but it is still not strong enough. Due to the imbalance in its development, it needs to regulate the structure of foreign trade.