The US-China Trade Imbalance

Introduction

China's state economic planning trade with the world continues to set overall goals for economic activity and to pursue industrial policies built upon domestic content requirements, subsidies, and other trade restrictions barred by the World Trade Organization. These policy tools allow Beijing not only to control demand for imports, but to exercise enormous control over all economic activity in China. Last year, China was the recipient of more foreign investment than any other country except the United States (Campbell, 2004). This torrent of investment is one of the principal factors driving China's economic growth, but foreign investment in China has strings attached. Complete figures are not available because the relevant policies are executed through private contracts with foreign investors, but anecdotal reports indicate that virtually all Western firms investing in China are forced to agree to certain investment performance requirements. These measures typically demand that most or all production be exported from China and that production technology be transferred to China.

The Problem

As troubling as trends are in China's trade, there are other reasons for concern. Currently, most of the products that China exports to the West are low-end manufactured products, such as apparel and toys. For the most part, these goods have not been produced in major developed economies for some time and are typically produced in developing economies. Because of their composition, therefore, China's current exports do not directly create domestic unemployment in China's developed trading partners, like the United States (China Today, 2004). Yet, the content of China's exports is hardly a reasonable excuse for Chinese protectionism or a reason to ignore China's growing trade imbalance, especially since Beijing is actively trying to alter the composition of those exports. Beijing is pursuing concerted industrial policies aimed at building strong domestic electronic, automobile, and pharmaceutical industries--to name but a few. China, however, still controls the yuan's exchange rate--the market does not. Finally, while Japan has clearly been a U.S. ally in the postwar era, China is at least a potential adversary (DeJong, 2004).

China's trade surpluses, trade policies, and industrial policies could create significant economic and industrial advantages in other spheres, the greatest concern in this regard being that Chinese wealth or technology gained through mercantilist policies could be used to strengthen the Chinese military. In sum, arguments often applied to the U.S.-Japan trade imbalance are simply not applicable to the U.S.-China relationship. The problems of China's trade ...