UNITED STATES AND CHINA

Tensions between the United States and China: In What Way Does This Matter For Europe?

Tensions between the United States and China: In What Way Does This Matter For Europe?

Introduction

For the past few decades, the U.S. has routinely imported more goods than it has exported, creating an ongoing trade deficit. But since the late 1990s, the nation's economic shortfall has increased at breakneck speed: The annual U.S. trade deficit rose from a record $164 billion in 1998 to more than $650 billion in 2004. While various causes have contributed to the trade shortfall, perhaps no single factor has been as pronounced as China's emergence as a global economic powerhouse. China, the world's most populous nation, combines high productivity with low labour costs in a way that few other nations can match, economic experts say. The exodus of manufacturing jobs to China has had a major effect on the U.S. economy. Americans formerly employed by U.S. manufacturing companies, for example, have increasingly found themselves without jobs. Also, with more products manufactured in China, American consumers are forced to buy imported goods, such as electronics and clothing, that might previously have been made in the U.S. According to analysts, the trend of importing consumer goods from China has severely aggravated the U.S. trade deficit.

The U.S. Trade Relationship with China

In recent years, China's strategy for economic growth has been to rely almost entirely on producing cheap goods and exporting them to other countries, especially the U.S. In describing the relationship between the Chinese act of buying U.S. debt and the U.S. act of buying Chinese goods, Atlantic journalist Fallows uses the example of a toothbrush. An American consumer, he explains, purchases the toothbrush at a retail outlet of the CVS drugstore chain. The American producer of the toothbrush, Oral-B, pays a Chinese factory to produce such toothbrushes. The factory owner is then required by the Chinese government to trade in the dollars from the sale of the toothbrushes for renminbi (RNB), or yuan, the Chinese currency at a local bank. The bank then turns over the RNB to the People's Bank of China (PBOC), China's central bank, which transfers the money to a Chinese government agency known as the State Administration for Foreign Exchange (SAFE), which invests the RNB in U.S (Faure, 2011). Treasury securities. So the money used to buy the toothbrush ends up back in the U.S. Once it has the money, the U.S. government may decide to reinject it into the U.S. economy, making it easier for banks to borrow money from the government and, in turn, lend it to the public.

The U.S. currently maintains a large trade deficit with China—meaning that Americans buy far more Chinese goods than Chinese buy American goods. In order to ensure that Americans continue buying so many Chinese products, China needs to make sure those goods are cheaper than products made in the U.S. It does that by keeping its currency cheaper than the ...