US China Trade

Impacts of U.S.-China Trade on Economies
Emphasizing on GDP Growth and Balance of Trade

There is no doubt that the economy of China is rapidly growing and changing the economy of the rest of the world directly or indirectly in a big way. The People’s Republic of China is divided into provinces and municipalities that are directly controlled by the Central Government. Trade history has shown a recent explosion with regards to China’s trade with the rest of the world. Throughout the 1980s international trade with China was fairly modest around 50 billion U.S. Dollars, but throughout the 1990s China’s exports grew substantially; from 2000 on that increase has surged even more, almost doubling in the past 5 years [9]. China also has caught up on imports, by importing roughly the same amount as it exports.

According to the United States Government, the United States is China’s most valuable trade partner totaling approximately 25% of all Chinese exports; whereas United States exports to China only represent 5.6% of total U.S. exports. The United States has increased its import activity with China, but those imports have shifted from other countries and have not been the leading cause of increasing imports. They have just led to an increased percentage of imports coming from China. Imports to the United States from China are typically consumer goods produced with low-skill low-cost labor. This has been one factor that has lead to the decrease in manufacturing jobs in the United States, but another large factor has been an increase in manufacturing productivity, without a large increase in demand. While exports to China from the United States are typically goods produced by high-skill labor, such as heavy equipment from Caterpillar. These exports to China are also typically goods that require very large and developed infrastructures to develop and manufacture products of this type.

The currency of China is the Renminbi, which when translated literally means the people’s currency, it has been around since 1949 [10]. When people discuss the Chinese currency they often refer to it as the Yuan. The Yuan, which means round, is a coin denomination of the Renminbi currency, that is the most frequently used denomination of Chinese currency. Just like most countries, the Chinese Government has a great influence over the value of its currency and it uses this influence regularly. In recent years, China’s Central Government has taken a lot of heat for artificially holding down the value of the Yuan, a subsidy that is estimated to be depreciating the Yuan by 40% [11]. For example in 2006 alone China purchased $200 billion in U.S. Treasury Bills and securities just to keep the Yuan down in value [11]. The Yuan’s value has a large impact on the economy of China as well as foreign countries like the United States. For example, if the value of the Yuan were to appreciate compared to other currencies, it would take more of a foreign currency to equal the same amount in Yuan. This means that the Yuan would be more expensive to people in foreign countries. As a result, it would become more expensive to do the same amount of business in China; which would result in China exporting fewer goods. Thus the Chinese Central Government has a great interest in keeping the Yuan devalued; which keeps China’s goods very cheap to the rest of the world.

In the past couple of years, with the US dollar being devalued also, the Yuan has gained even more ground, but in the same time China has changed its traditional currency peg. The Chinese Yuan has traditionally been pegged to the United States Dollar where approximately 0.121 United States dollars purchased one Yuan. Since 2005 however the Yuan has been allowed to appreciate 18% against the dollar as shown below, effectively increasing the cost of Chinese imports to the United States [7]. China removed the U.S. Dollar only currency peg and moved towards a market value based on a pool of currencies, which according to U.S. Treasury Secretary Snow is a step in the right direction towards reversing the trade imbalance with China [7]. This appreciation of the Yuan is helping push the balance of trade back towards the United States, it will in no way completely correct the trade deficit, but will help push it in the right direction for long-term economic stability in the United States. With the Yuan traditionally being suppressed to a value pegged to the Unites States Dollar, Chinese products stayed an unbelievably low cost, and provided an incredible stimulating power to the Chinese economy; which is what has led to such a large United States trade deficit. These latest trends of the Yuan being repegged, and gaining value are steps that will help multi-national corporations in the United States remain competitive and continue to export goods for the coming decades; these steps have also allowed the United States’ Government to not have to develop trade sanctions against China to keep jobs in America, which previously appeared to be an inevitable result.

The number of imports and exports to a country go a long way in determining the GDP of that country. The following charts show a comparison of the imports and exports for the United States in the year 2004, which is the latest year compiled data is available.


Figure 1: Comparison of United States Exports by Country – adapted from International Trade Administration Data [5]


Figure 2: Comparison of United States Imports by Country – adapted from International Trade Administration Data [5]

As one can see from the charts, China was the second largest source of imported goods into the United States in 2004 at 197 billion Dollars. Conversely, China was the fifth largest destination for exported goods from the United States in 2004 at 34.7 billion Dollars. That difference equals a 162 billion Dollar trade deficit with China in 2004. In 2007 those numbers grew to 65 billion and 321 billion Dollars respectively, so the trend is not reversing yet [12]. Trade with China has been growing at these high rates for a number of years, for the past 5 years export growth to China has averaged 24.24% growth, while import growth has grown an average of 20.90% as shown in the chart below.


Figure 3: Graph of 20 year Trade History between the United States and China – adapted from data provided by the U.S. Census Bureau, Foreign Trade [12]

GDP stands for Gross Domestic Product and in mathematical form is:

GDP = consumption + gross investment + government spending + (exports – imports)

Of all the factors that affect GDP, the last term, exports minus imports, is the one that is typically given the most attention. In the case of the United States and China trade relationship, the United States has larger imports than exports. As a result, in the United States GDP equation, the term exports minus imports lowers the GDP value. Conversely, China currently has larger exports than imports, so this term has the effect of raising their GDP. Naturally, we are considering the effects of trade between two countries, but to calculate the overall GDP, one would use the cumulated imports and exports with every country.

Relating back to the last term in the GDP equation, this term can be thought of as merchandise trade. The other terms that form GDP have to do with government spending, investments, and the like. But the term exports less imports deals strictly with the merchandise trade. It is interesting to note the reliance of certain regions in the world on merchandise trade. Refer to the chart below for the East Asia and Pacific Region’s reliance on merchandise trade for GDP.



As you can see from the chart, in 2005 the merchandise trade was responsible for 75% of the East Asia and Pacific Region’s GDP. The demand for imports from China can generally be traced to one factor. Goods manufactured in China for export around the world are generally cheaper than domestically available goods, as discussed earlier. The World Bank runs an International Comparison Program with the goal of comparing price data and estimating purchasing power parity (PPP) for countries around the world. It compiles the data periodically and publishes the results on the World Bank website. According to the 2005 International Comparison Program, the Price Level Index (PLI) for China was 42. The PLI is used as a comparison of price levels between countries. The PLI is set up with the United States equal to 100. By comparing the PLI’s of China and the United States, 42 to 100, one can see that goods purchased in China are much cheaper compared to goods purchased in the United States [1]. Much of this comparative advantage between the United States and China is due to the government subsidization of the Yuan to keep Chinese goods low cost.

The United States has been the world’s largest economy for over 100 years. The United States GDP was estimated at $13.8 trillion in 2007 [5]. By comparison China’s GDP was estimated at $3.42 trillion in 2007 [4]. China’s economy is now the fourth largest in the world behind the United States, Japan, and Germany. This is the result of the increase in globalization worldwide, as more and more countries economies are becoming intertwined and dependent on one another for growth. The increase in Direct Foreign Investment (DFI) by corporations has led to this dependency among economies. Certain countries are able to hold a comparative advantage over other countries due to environmental or economic conditions. Examples include readily available raw materials and cheaper labor. One of the reasons for DFI in China is the readily available cheap labor. With a labor force of approximately 800 million, the United States and other countries have relocated a number of manufacturing facilities to China [4].

The intertwining of economies between countries can serve as both a blessing and a curse at times. The economic slowdown in the United States will likely cause China’s GDP growth to fall to 10.5% in 2008 [6]. This is a decline from the 2007 GDP growth rate of 11.4%. In fact, China’s GDP growth rate has now been in the double-digit range for five straight years [6]. What follows is a chart showing China’s growth in GDP as a percentage, greatly supported by the over 20% growth rate in China’s exports to the United States.


Figure 5: China GDP Growth adapted from data on China Economic Indicators - Cumulative [2]

As you can tell from the chart, China’s GDP has grown quite strongly over the nine years. As previously stated, the potentially severe economic slowdown in the United States economy is only projected to cause China’s GDP growth rate to fall to 10.5% in 2008, still considered stellar performance. One of the reasons the United States economy is slowing down is due to the subprime mortgage crisis. This means that there is less United States money to invest in China and elsewhere. There is also less money to spend on importing goods and services from China. This is showing up in the 2008 import export figures, which are available through February. So far imports are only up 3.3% from China, while exports are up by 29.3%, showing China’s strong economy and desire for merchandise. In general terms, there is a lot more risk in the financial markets in the United States, so large banks and lenders are more restrictive when it comes to loaning out funds. Despite the negative impact of the United States economy on China’s economy, the Chinese Central Government has continued to manage their economy. In a recent article the chief of the People’s Bank of China, Zhou Xiaochuan was quoted as saying that he was confident that China’s economic growth in 2008 would exceed the 9.3% that was predicted in the International Monetary Fund’s (IMF) annual outlook [3]. He went on to say that economic and financial reforms had given China a healthier foundation to face global uncertainty and China had so far avoided any significant fallout from the U.S. credit crunch. He stated that the two core tasks of policy makers in China were to prevent inflation and economic overheating.

As a result of the continued increasing development in China, the standard of living for all Chinese people should begin creeping up. The inflow of DFI creates employment for the Chinese people. This employment helps to raise their standard of living. As their standard of living increases, so should their taste for luxury and imported goods. This should eventually cause China’s GDP to level out and to align with the rest of the world on a growth standpoint. One signal of this eventuality is a recent survey that labor costs in both China and India have jumped, while real wages have fallen 1% in the U.S. in the past year [8]. Transportation and shipping costs have risen as well. All of this signals that the GDP growth rates of China, the United States, and other countries should begin to equalize. The comparative advantage of low cost labor in China is evaporating.

In closing, due to the large reliance on China that the United States has, imports from China by multi-national companies will continue for the foreseeable future. However China’s dependence on United States goods created by a high skill labor force that has very expensive infrastructure requirements is also going to continue to rise at an incredible rate. With the Yuan gaining value over the past couple of years versus the United States Dollar, the United States will begin looking for other low-cost countries to purchase consumer goods as the race to the bottom continues. China however will continue subsidizing its federal currency in order to remain cheap to countries looking for consumer goods, but the next question that needs to be answered is that if subsidizing the Yuan is a sustainable venture over the long run. As China’s economy has grown over the past two decades the subsidizing of the Yuan has increased significantly and China will have to decide if this is a sustainable behavior. But as China does become more of a free market and consumer demands rise along with workforce demands some of the Chinese comparative advantage discussed earlier will diminish and China will have to turn to some of the tactics that companies in more developed societies have, such as efficiency and automation. However, this is going to be a very slow trend and will take years to accomplish, so rest easy in knowing that you will still be able to purchase your favorite piece of electronics equipment at a very low price.

1. 2005 International Comparison Program. 26 Feb. 2008. International Bank for Reconstruction and Development/ the World Bank. 19 Apr. 2008 <>.
2. "China Economic Indicators - Cumulative." The World Bank. 2 Apr. 2008. 13 Apr. 2008 <>.
3. "China Focusing on Inflation, Overheating - Zhou." Reuters. 13 Apr. 2008. 18 Apr. 2008 <>.
4. "Economy of the People's Republic of China." Wikipedia. 15 Apr. 2008. 18 Apr. 2008 <>.
5. "Economy of the United States." Wikipedia. 2 May 2008. 3 May 2008 <>.
6. The JOURNAL of COMMERCE ONLINE. "U.S. to slow China GDP. " Journal of Commerce [New York] 25 Mar. 2008, ABI/INFORM Global. ProQuest. 6 May. 2008 <>
7. Isidore, Chris. "China Revalues Yuan and Ends Fixed Dollar Peg." CNN Money. 21 July 2005. 28 Apr. 2008
8. Mandel, Michael, Steve Hamm, and Christopher Farrell. "Are They Good for America." Business Week 10 Mar. 2008: 41-46.
9. Mankiw, N. Gregory. Interview with House Committee on Ways and Means. White House. 30 Oct. 2003. 13 Apr. 2008 <>.
10. "Renminbi." Wikipedia. 16 Apr. 2008. 20 Apr. 2008 <>.
11. Scott, Robert E. "Costly Trade with China." Economic Policy Institute 188th ser. (2007). 21 Apr. 2008 <>.
12. "Trade in Goods (Imports, Exports and Trade Balance) with China." Foreign Trade Statistics. 10 Apr. 2008. U.S. Census Bureau. 30 Apr. 2008 <>.
13. "U.S. Exports by Country." International Trade Administration. 2 Mar. 2005. Department of Commerce. 13 Apr. 2008 <>.
Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License