Trade Issues between US and China Essay

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This essay will research the relationship between the United States and China in regards to trading policies. A brief description of the United States’ foreign policy will be given and following this an examination of the US-China trade relation will be analyzed with historical background ranging from 1979 to present. In the development of this essay. The context of the research will center around the four p’s in trading; power, principles, prosperity and peace and how in each area China has maintained such variables in trading.

The other issues that will be delivered as integral to the relationship of US-China trade will be the US-Soviet relations in regards to the China Card, Tiananmen Square, human rights, and labor standards.

China’s Trade The concept of trade between countries is one that has been prevalent since the shipping industry of early China. In fact China and its role with the WTO is one in which there exists strain. China became a member of the WTO in December of 2001.

China had been an original member of GATT (General Agreement on Tariffs and Trade) but has since declined any efforts towards globalization. However, since its inclusion with the WTO in 2001 China is under specific WTO regulations.

These regulations are highlighted as nondiscrimination in trading policies, market opening, transparency and predictability, undistorted trade, and preferential treatment towards developing countries. China’s economy can truly be seen as open since the late 1970’s.

Thus, in the early 1980’s China became less sequestered which is proven with its membership of Taiwan Province of China in the IMF as well as the World Bank which further emphasizes China’s transformation from a centrally organized economy to a more market-oriented economy, as such China, “abolished trade plans, decentralized trade, slashed tariffs, unified the dual exchange rates in 1994, and removed exchange controls on current account transactions in 1996” (Adhikari & Yang 2002). Other reforms also took place in China, and corresponding with this transformation China has witnessed an influx of foreign trade as well as investments.

In accordance with this statement China’s foreign trade is reported to have gone from $10 billion in the late 1970’s to $278 billion in the year 2000. The numbers for the year 2000 made China the sixth largest trading nation on a global scale, “The trade-to-GDP ration increased from 10 percent at the beginning of reforms to about 40 percent in the late 1990’s. China’s total inflows of foreign direct investment (FDI) reached $47 billion in 2000, second in size only to those received by the United States” (Adhikari & Yang 2002).

China’s open trading policy began in the 1970’s with Mao Zedong’s meeting with then US president Richard Nixon. The next stage of China’s development occurred in 1979 with Deng Xiaoping’s visit to the US.

This is when China began to truly embrace foreign trade; this boosted China’s own domestic economy and allowed the country to compete on a global scale in the areas of foreign capital and technology (Eckholm and Sanger 1999). When China is initially brought into the WTO there was discussion of how this would alter the economic conflict between the U. S. and China into a global level.

Thus, the United States Congress was wary of the substantial evidence that trade with China may prove to be dangerous. This is supported by the fact that the economic conditions in America may decline over the next decade thereby bringing forth a stronger dependence on labor in China and MFN, “A substantial use of force to suppress dissent in Hong Kong would be one such trigger. It appears that Chinese officials are cognizant of this fact and are likely to eat away at the liberties of Hong Kong’s people, if they choose to do so, in small bites, so as not to draw foreign attention” (Naughton 1998; 66).

In the effort of fair trade and a growing economy America has tried to curtain negative assessments made of the Chinese governments especially in light of Tibet. One such American company that strongly promote U.

S. -China trade is the Boeing company that is looking toward China for their next marketable plane. Other groups include the National Committee on U. S. -China Relations who try to persuade the American people that human rights in China is equitable and their sustaining efforts combine with restrained behavior in China twine together to enhance a more morally correct China that is appropriate for trade (Naughton 1998; 66).

These restrained sentiments felt by the U.

S. Congress exist in part due to the 1996 Taiwan Strait crisis which allows for the overly cautious approach Congress is setting forth with China because of China’s presumed power and its conscious ability to inflict harm on specific U. S. interests. However, by being cautious Congress ensures that the future trading negations between these two countries should be defined as a stable relationship (Naughton 1998; 67). China and GATT The Chinese domestic politics of WTO accession have changed dramatically.

In the beginning China mobilized with alacrity and cohesion to once again become a member of GATT. The consensus of such industries as petrochemicals, and pharmaceuticals could agree upon the need for their nation to be involved with GATT, this proves China’s desirability towards a more open doors policy with trade. Part of the reason for China’s renewed interest in GATT may be attributed to it appear that GATT membership would defuse recurrent trade frictions over U. S.

MFN status, but it was obvious that China’s prestige and importance in the world demanded full GATT membership.

Moreover, it was clear that GATT membership could be an important force driving the economic reform process forward. For all these reasons, national interest was elevated above sectoral interest groups. The flood of publications in China on the challenge of GATT membership clearly demonstrates the anxiety felt by many sectoral interests but also reflects what they clearly felt was the inevitability of membership and the serious nature of the import competition GATT membership would bring (Naughton 1998; 177).

Inside of Chinese nationalism however there seems to be rising policies that are contrary between the U. S. and China; China feels pressured by the U. S.

and that they make demands that cannot be fulfilled without jeopardizing China’s own economy. Such demands that have been focused on and are met by the Chinese include their unifying of the currency, their reduced tariffs, as well as their cut on nontariff barriers, and equally important is their demonopolization of the foreign trade system (Naughton 1998; 177). China, in conjunction with U. S.

trade policy has subsequently, since being incorporated into GATT, has opened their country to trade. In 1997 they, “…launched into a major program of state enterprise divestment and restructuring that can be seen as a response to U.

S. demands that the government cease subsidizing state-owned enterprises” (Naughton 1998; 177). In their interest in trade China has a strong interest in augmenting their enforcement capability, improving their customs service as well as paying attention to their unifying revenue collection capability (Naughton 1998; 178). The U. S.

seemingly has correlating objectives in regards to China’s trade. The United States Trade Representatives have a clear objective when it comes to China; there is a focus on the imbalance of trade, and the exorbitant amount of trade exporting China has accomplished. This is a major issue for the United States who no longer dominants trade because of the majority exports that are labeled as labor intensive consumer goods that the Chinese have flooded into the foreign market. The U.

S. businesses are in favor of trade with China because in their own systems of operations they have subsidiaries in China.

These businesses recognized as Naughton states, Perceiving the importance of China’s economy in future years, numerous American businesses support a policy of intensified engagement with China. U.

S. businesses are an important lobby not only because of their interests but also because of their perceptions of China. Given the magnitude of U. S. investment, many businessmen have now spent time in China. They see that China is a dynamic, rapidly evolving, and increasingly prosperous society.

Their positive impressions partially offset the negative impressions of China created by problems relating to human rights, nuclear proliferation, and arms sales. (Naughton 1998; 179). Thus, the transformation of China into a trading conglomerate was rapid. China’s Trade History 1979-Present China first envisioned an open economy in 1979 with the People’s Republic of China (PRC). Since this inception, China has increased its exports to an annual average of 16. 1 percent.

The country as a whole is classified as the tenth largest exporter in the world.

In correlation with these facts, China’s exports have also grown at a statistic of 15 percent per year. Furthermore, China’s annual growth rates in trade grew to an increase of three times the world’s rates in the years 1978 and 1990. It was in 1993 that it was reported that foreign trade in China made up 38 percent of the nation’s gross domestic product. Thus, China has expanded in trade since 1979.

In 1978 China had not interest or involvement in foreign investment, yet by 1993, China has acquired the interest of nearly $60 billion foreign investors (Shirk 1994; 1).

China began a reform strategy in 1979 that sought to enable foreign trade investments as a priority to the progress of the PRC. From early 1960 to the 1970’s China based its economy on the concept of self-reliance, and approached their way of life strictly in egalitarian methods. This approach quickly showed its proneness to failure however and China recognized this and soon began to implement a different model. This new model was based on economic marketization and internationalization under authoritarian rule (Shirk 1994; 7).

China based it’s economic prowess after the Communism in the Soviet Union. This style of command present in China enabled the country to produce high rates of industrialization which from the years 1949-1980 were estimated at 10 percent annually. Despite these numbers the truth was that in order to remain self sufficient China had to sacrifice manpower by way of continually increasing capital and labor into the industry in order to maintain such high growth (Shirk 1994; 10). In 1979 this all changed.

Through power (one of the four p’s) Hua Guofeng allowed a small section of market activity in the idea of allowing state-owned firms to sell their own quota output, “on their own at market prices and new nonstate firms were allowed to form. The higher prices of the market were a powerful incentive for managers to enter the plan and then to press for smaller plan quotas and more market opportunities” (Shirk 1994; 28). In this fashion Hua Guofeng allowed the economy to outmode the Communist plan. From 1980-1981 reformists attempted to promote a balanced economy by parlaying resources to light industry and to agriculture.

Thus, heavy industry suffered an alarming deficit and consequently in 1982 representatives allowed heavy industry’s share to be restored (Shirk 1994; 29). Thus, heavy industry in China has always received favored treatment, while counter to this light industry is funded by the self, “China’s dramatic increases in exports and domestic growth may derive primarily from labor-intensive light industry and agriculture, but central government capital investment does not reflect this change and still favors heavy industry” (Shirk 1994; 29).

On the topic of open policy it was not until 1984 that China extended its trading freedoms to the provinces of SEZ’s to Hainan Island and about fourteen other coastal cities. The new open cities were allowed to offer tax incentives for foreign investment. This open concept was furthered in 1984 with the inclusion of other deltas such as the Pearl, Yangtze, and Min Rivers (Shirk 1994; 39). The year 1988 saw secretary Zhao Ziyang further widen open policy to include the entire coastal zone which had a population of 200 million.

Zhao stated that an unbalanced growth was harming China’s economy in that the inland regions were not being exposed as the coastal regions to different cultures as well as wealth which meant that China was not advancing at the same speed in technology, “therefore the coastal areas should be allowed to move ahead by using their better labor, communications and infrastructure, and scientific and technological capacity to attract foreign business and expand exports” (Shirk 1994; 40). Despite these ideas and Zhoa’s promotion of them, he was fired in 1989, and replaced by Premier Li Peng.

Although Li Peng was a conservative he implemented a strategy of building his own personal support base. In lieu of Zhao’s failure to incorporate Shanghai in his plans, Li Peng decided to grant that area more economic development and autonomy for foreign trade which yielded more revenues.

He gave the inland provinces full foreign exchange. In June of 1992, Beijing, “…authorized twenty-one additional cities, located along the Yangtze River and in the Northeast, to offer special incentives to foreign investors” (Shirk 1994; 41).

This action in turn advanced inland provinces to endorse and participate in international business with the full approval of the local government. There were created special development zones which allowed foreign investors to be offered certain terms in regards to trade, The development zone policy was extremely popular among local leaders, who saw it not only as a way to gain access to international business but also “as a means of gaining benefit and privilege.

“22 During the first nine months of 1992, almost 2,000 development zones were set up, a large proportion of them in inland areas.

As a result, the inland provinces raised their 1992 share of foreign capital attracted to China from 7 percent to 10 percent. 23 By early 1993 the press was reporting that “nobody knows exactly how many such zones, which attract investment with a variety of tax breaks and other favorable policies, have been launched in China. ” (Shirk 1994; 41). These concepts spread throughout the developmental zones and thus were responsible for certain negative consequences.

These consequences included economic overheating, a severe shortage of funds, as well as energy, transport and certain raw materials (Shirk 1994; 55).

Shortly after this China had a type of national intervention in which the State Council in 1993 reinstituted a ‘central approval’ for each newly formed developmental zone (Shirk 1994; 55). In accordance with the CCP general secretary Jiang Zemin demanded inspections on all zones which began a mass shut down of each zone which did not establish infrastructure and other foreign conditions. By the 1990’s China had established selective authoritarian rule in their open zones. About 90 percent of foreign investment in these zones was involved in the coastal states and 40 percent is reported to belong to Guangdong.

This left the inland provinces seeking their own investors. These investors were found with Russian, Japan and South Korea. These investors sought out the Northeast and Shandong Province. It may then be stated that the concept of an open policy has greatly enhanced the coastal regions of China while leaving the inland provinces lacking in investors, and market trading which attributes to the imbalance in China.

China’s Trade Relations China, although seemingly embattled into foreign trade has quickly grown with their new found economy.

China is in international demand and that demand is only increasing. This is due mostly from power. In policy and the envisioning of China’s different leaders and leaders in foreign trade, the Chinese economy has shucked off their dominant Communist ways and have since 1979 been approaching foreign trade with prosperity.

China compromised in joining GATT but this lead investors to believe that China’s intent was solely for their own prosperity as well as others and this initialized trade between countries.

Thus, it may be stated that in part, China has grown with their open policy and in a way realized peace through trade because of the restrictions of the United States and of GATT on their trading policy and thus China has grown in terms of economy. The other issue that arose from China’s power in their economy was the dual rate system, As for international institutions, although the International Monetary Fund advocated convertibility, it would accept some degree of exchange controls.

Joining GATT did not require full convertibility, although dual rates for trading activities, often viewed as export subsidies, were an obstacle to membership. The United States, already running a trade deficit of approximately $20 billion with China, complained out of one side of its mouth… In response to international and domestic demands for a reform of the foreign exchange regime, Chinese leaders gradually devalued their currency and created an officially sanctioned swap market for foreign exchange.

Devaluation began in 1981 with the adoption of a special internal settlement rate of 2. 8 yuan to $1 U. S. for foreign trade transactions.

(Shirk 1994; 57-58). It is thus stated that Chinese goods were underpriced due to their state subsidiaries. Although the exchange rate made Chinese good profitable, imports were not easily winning the economic battle in China as they were comparably overpriced. As a result of this during 1981-1984, dual rates existed and were ‘substantial’ (Shirk 1994; 58). The growth of exports as well seemed to be vanishing as the 2.

8 yuan rate was weak.

The dual rate was a spot of heavy criticism among other international trading nations. The International Monetary Fund stated that dual rates were in clear violation of IMF’s standards. As a result the United States who had been a large financial supporter of China filed several complaints stating that the internal rate was “a form of export subsidy” (Shirk 1994; 59). The State Council responded to these issues in 1985 by getting rid of the dual rate exchange in favor of the internal system (as mentioned prior) of a 2. 8 yuan.

The government subsequently devalued the renminbi five times “13 percent in 1986, 21. 2 percent in 1989, and 9. 57 percent in 1990” (Shirk 1994; 59). China Card The issues of dual exchange rate are clearly seen in the China Card.

The Chinese economy has been witness to exorbitant expansion within the time frame of 1970- present. This has allowed for the retardation of recession seen across Asia. China is growing exponentially. The Chinese bank has added problems to the Chinese economy by continually lending money to governmental projects that abound in profitless margins.

In support of this China had in 2004 reportedly lent out nearly 40 percent of its gross domestic product with reports being silent as to whether or not there were any signs that this money was returned with interest. China also has a fixed exchange rate with the US dollar which lends investors to believe that China is overdue for an economic crisis. The only thing that seems to be holding China together is their strict capital controls which lock domestic savers into these bankrupting banks across China.

Tiananmen Square protests of 1989 The Tiananmen Square Massacre occurred June 4th 1989. This was a protest in response to the government of the People’s Republic of China which students and other activists were party.

The PRC government initiated riot gear and as such many of the peaceful protestors were left dead; the number murdered during the protest ranges anywhere from 200 to 3,000 Chinese students as well as Red Cross. The protest was devised in view of held beliefs that the Communist Party of China was corrupt.

The protest also shared the views of workers who stated that economic reform was leading the country towards inflation which was leading to unemployment and the immense amount of poor in the PRC (Wikipedia 2006). The protestors did not disperse when asked to by the government and as such the government’s counteraction was to declare martial law.

Martial law allowed for tanks to infiltrate Tiananmen Square and essentially wreak havoc. Foreign press was banned from the event (Wikipedia 2006).

This event lead to the questioning of the labor laws in China and the fairness and consciousness China was paying towards human rights. If China wanted to sustain the sequestering of this massacre then this was a statement of omission in which China was essentially proving the protestor’s beliefs that trade as connected with labor was inhumane.

Conclusion In conclusion this paper has expounded on the U. S-China trade relations in due course of China’s GATT acceptance and their WTO acknowledgements in order to provide a stronger economy.

The other half of the paper represented dual rate as well as the China Card in which Chinese currency and their propensity of cheap goods allow for the country to become strong but according to IMF China was in violation foreign policy. This leads to further evidence of China having unfair labor laws with the massacre that occurred at Tiananmen Square in 1989.

Thus, China’s trade is a dichotomy that is both good and bad; prosperous for the PRC yet lacking in support of the common laborer. The relationship between the U.

S and China as described in this paper is teetering and yet, because of the WTO and foreign investments such as Boeing, trade with China is inevitable.

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