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Category: Business

Autor: anton 10 March 2011

Words: 2662 | Pages: 11

The United StatesЎ¦ Trade Relationship with china and Japan

Since 1950s, Japan and the United States have had trade interactions which mutually benefited their economies, but took many steps and hardships to get to the dominating level where they are now. On the other side, China and the US have taken careful steps to open their markets to each other and normalize trade relations with the ending of economic isolationism after the Cultural Revolution. Globalization brings both advantages and disadvantages to the world. It is interesting that US supposed to get most benefits from globalization due to the US has strongest economic power in the word. However, the US has formed large deficits during the past decades while developing trade relations with China and Japan. The paper will focus on US trade relationship with China and Japan and how the US payoff these deficits.

Expanding US trade with China: Issues, Obstacles, Consequences and Imbalances

A trade relationship was also built between the US and another Asian country, China. Throughout the past twenty years, many issues and obstacles have also been overcome in expanding trade with China.

Since the Ў§open doorЎЁ policy in the late 1970s, successful trade and investment with China has been a common goal among American businesses. Along the way, there have been many issues and obstacles to overcome as a business relationship with China has been formed. In light of consideration for ChinaЎ¦s membership in the WTO, there are still issues to be dealt with and examined. Through the development of an economic relationship with China, we will attempt to examine the causes and impact of trade imbalances with China, as well as implications of the imbalances and plans for dealing with them in the future.

In the 1970s, US trade was not very extensive with China, yet many entrepreneurs were anticipating Ў§exclusive dealsЎЁ in the region. They would travel to Beijing with big hopes, only to find they had to deal with China completely on ChinaЎ¦s terms. Importers had more success, as Ў§The China Trade was simple at that time, being primarily the import and export of goods that were packaged in boxes and balesЎЁ (Lubman, 2). By the end of the 1970s, most American exporters were critical and weary of trade with China, while the importers had had better success. In 1979 with the adoption of the "open door" policy, foreign investors were welcomed into the region, as they anticipated access to billions of untouched customers. The Open Door policy, in general terms, meant trade liberalization. Yet China did not let an unfettered flow of goods and services enter its market. Rather, it insists that anything that can be made within the boarders will be made at home.

With great expectations and aspirations of penetrating a new market, American businessmen and investors plunged into the market. Most American businessmen did not view China as simply a new market to exploit, rather Ў§in the softer vocabulary that the Chinese themselves offered, of friendship and assistance to the countryЎ¦s modernization,ЎЁ (Lubman, 3). Americans were more lenient with deals and transaction terms because they hoped their consideration would yield enormous profits. Another reason special rules applied in dealing with the Chinese was to make sure the relationship was not built with AmericaЎ¦s competitors instead. They wanted to make sure that a relationship and loyalty was forged with them instead of their European or Japanese counterparts.

Yet frustration surmounted in part because Americans were used to doing business based on legal agreements, signed contracts and careful attention to financial analysis. However, Chinese businessmen were less apt to sign documents or use lawyers. Another mistake on the AmericanЎ¦s side was the lack of research or preparation on companies, culture and the country itself. They believed that the information they were collecting was unique and groundbreaking. Americans did not bother to look beyond what they were doing and learn from others mistakes and research from the past. The fact was, since the 1970s information was available about how to train people, do marketing research and work out the kinks of doing business in China. The problem was no one knew about previous research or bothered to ask the proper questions about it. Such information could have been used to their advantage, but was overlooked or ignored as businesses virtually learned the hard way how Chinese negotiate and do business.

The feeling in the late 1980s was that working with the Chinese was next to impossible. In light of the political turmoil in June 1989, many American investors gave up because they had Ў§overestimated business and technologyЎ¦s effect on China and underestimated difficulties working in the Communist system,ЎЁ (Lubman, 4). With the Tiananmen Square incident, a Ў§pallЎЁ was cast over foreign direct investment FDI even as China tried to bounce back and raise FDI. China did this with efforts directed towards promoting investment through policy pursuit, and developing legal institutions while the economy grew.

Yet questions about the strength of central government have been raised as local departures from central policy increase. Since the opening policy began, investment has been regulated as laws have been made and then later changed. Inconsistencies between national and local legislation have also been found so much so that Beijing has had to forbid certain tax incentives. Because of the problems with FDI, the strength and role of the Chinese government and pending membership into the WTO, there are many issues to be sorted out in the trade relationship between the US and China.

The Japan and United States Trade Imbalances

Since World War II, Japan has experienced a miracle of economic success. The trading of raw and manufactured goods with the United States was a key in lifting Japan back on their feet after the war. The integration of Japanese businesses into the United States gave Japan opportunities to expand their markets and economy globally. The Japanese economic miracle can be explained by examining the different segments of the Japanese economy and the imbalances of trading with the United States. One question I have about JapanЎ¦s economic recovery is, was it the Japanese who rebuilt themselves, or did the United States open market and rebuilding efforts trigger JapanЎ¦s economic burst. By researching the history of the bilateral trade relations between Japan and the United States, I will explain the possibilities the future holds for these countries.

Japan and the United States have had strong trade flows in both their imports and exports. The most outstanding imports the United States were receiving were textiles, steel, color TVs, and automobiles. Japanese firms, especially those in the manufacturing sector, were portrayed in the United States as efficient organizations producing high-quality products and sometimes the glory of high economic growth and strong exports was extended to the Japanese society in general (Ito, 365). The main issue at hand is how Japan and the United States maintain an equal balance of trade. Whereas nearly all nations have sought trade expansion, they have generally tried to avoid an excess of imports over exports, which is known as a deficit in the balance of trade (Brown, 5). For Japan the United States is the most important trading partner, both in exports and in imports. Over a third of Japan s exports go to the United States. This is more than double the share of JapanЎ¦s exports going to all the European Community countries combined (Ito, 342). The bilateral trade also benefited the United States greatly by exporting American products to Japan. The United States started selling products to Japan in 1955. The main items sold initially to Japan were industrial machinery, telecommunication and computer equipment, grain, and chemical products. During the early post war period the trade imbalances were mostly favored to the United States in a higher export percentage. As the Japanese started building up their economy at an incredible rate each year, in return, the export advantage the United States had over Japan has diminished.

The Japanese economy had a long path to go until it could begin to match up with the United States level of power. In the early 1950s the United States accounted for about 45 percent of total global production including 80 percent of the world s cars, held 43 percent of international reserves, and furnished about 20 percent of global exports (Brown, 96). Japan first surpassed the United States in per-capita GNP in 1986, after a long period of rapid growth. The real GNP growth rate of Japan averaged more than 10 percent per year between 1955 and 1973; it slowed down to an average of 5 percent per year from 1973 to 1988. As a result, the Japanese economy in 1988 was 9 times its 1955 size in real GNP. During the same 33 years, the United States economy grew to 2.67 times its 1955 size (Ito, 3). The United States was bigger and stronger to begin with in 1955, which made it harder for the U.S. to double their size. A factor to keep in mind about these facts, the Japanese economy in 1955 was very weak which made the economy easier to increase its total size.

The United States is JapanЎ¦s largest export market for consumer goods. Japan, in turn, has become the largest foreign consumer of American debt. Such developments are pulling these two countries economies into increasing interdependence, yet injecting serious political tensions into their relations. Ў§Dissatisfaction is no longer limited to local producer groups such as Flint, Michigan, autoworkers or Japanese rice farmers that are threatened by the other countriesЎ¦ participation in their domestic market. Rather, in both countries their bilateral relations are quickly becoming a thorny political issueЎЁ (Kernel, 1). The bilateral trade relations will always be a debated political topic and there is not a correct or incorrect way to deal with these issues. The United States, which exports constituting only a little over 10 percent of its gross national product GNP, is less reliant on trade than virtually any other country in the world. Even Japan, with its reputation as a great trading nation, is much less dependent on trade than any European nation. Despite its shortage of natural resources, the sheer size of JapanЎ¦s economy, second only to that of the United States, enables it to meet most of its own needs and to consumer most of its own production (Moon, 3) .

The signs of trade-induced strain between the United States and Japan are evident in both formal diplomatic relations and in public opinion, with so called Japan-bashing often heard in street corners and in Congress. U.S. complaints center on the bilateral trade deficit with Japan, which has hovered around 162 billion annually since 1995 and which exceeded 826 billion in 2005 (U.S. Census Bureau) . Furthermore, Japan complains that American efforts to reduce the trade deficit violate principles that are both imbedded in international law and regularly professed by American trade officials. Diplomatic relations reached a low point in summer of 2004 with parties exchanging threats of trade sanctions amid heated bilateral negotiations that did more to aggravate tensions than to resolve issues (Brown, 93).

There is a constant cycle where Japan sends its biggest chunk of exports to the United States. The United States sends Japan American products but not at an equal balance. The American economy gets upset because American workers are losing their jobs because the American companies not able to compete with Japanese companies. For example, the high levels of unemployment in Detroit have been ascribed partially to annual sales of nearly 2 million Japanese cars in the United States (Brown, 5.) This would be of little concern if these imports were balanced by exports that produce employment and profits from American products sold abroad, but during a trade deficit they are not. Then Japan connects this circle back to the beginning of the cycle by investing billions of dollars into the American economy. The Japanese want the American economy to do well, so the Japanese investors will get a good return in their investment in American businesses. Japan depends on U.S. Markets to accept 30 percent of its exports and on American products, which constitute 25 percent of its imports. The trade dispute could greatly affect the economic relationship as a whole. The United States relies on Japanese capital to supply needed investment funds Japanese investors hold more than 100 billion in foreign direct investment in the United States and a similar amount in U.S. Treasury bonds and Japanese investors depend upon the health of the American economy to generate returns on that investment (Brown, 94).

Trade Deficits

A bilateral deficit is when a country buys more dollars in products than it sells. Politicians often label the US deficit as detrimental to the US economy because it takes jobs away from the American worker. Some people have sought to make AmericaЎ¦s increasing deficits as a campaign issue, saying that ballooning deficits mean the loss of millions of American jobs. Contrary to the common spin, trade deficits are not necessarily bad news. A trade deficit can even be good news for an economy, reflecting flush consumers and an attractive climate for investment, according to Preeg, associate director of the Center for Trade Policy Studies at the Cato Institute.

Regardless of whether a deficit is a good or bad thing, the United States still has increasing deficits. According to U.S. Census Bureau, the NationЎ¦s international deficit in goods and services increased to $725.8 billion in 2005 from $617.6 billion in 2004(see Appendix 1). How trade relationships were formed with Japan and China and were there always deficits? I think the main reasons which causes trade deficits are interest rate and currency exchange rate.

Obviously, the difference of interest rate is a main factor. Scott and Blecker state that lowering U.S. interest rate results in a capital outflow and a depreciation of dollar, which corrects trade imbalance. Also, Yen-dollar real exchange rates are closely tied to the domestic interest rate. For example, when dollar was worth 250 yen or more in the late 1970s, the US ran a large trade deficit with Japan. This trade deficit is due to undervalued yen. After yen realignment at around 120 yen per dollar after 1990s, US trade deficit decreased.

The US trade deficit which started to develop from the mid 1990s had its origin in ChinaЎ¦s devaluation in 1994, which resulted in the Asian Financial Crisis of 1997. Asian countries could not compete with China, and quickly developed huge trade deficits, and their currencies collapsed shortly thereafter. Aggressive exchange rate policies of China will not leave other industries unaffected. ChinaЎ¦s devaluation in 1994 was the origin of the Asian financial crisis of 1997 and the expanding US trade deficits (Scott and Blecker 4). If the Yuan-dollar exchange rates are not adjusted, a similar collapse of US dollar is likely to occur. Also, the Asian Crisis of 1997 was the result of development in Pearl Delta surrounding Hong Kong only. Increased mobilization of other regions of China will exert pressure on other Asian currencies and US trade deficit unless yuan-dollar exchange rate finds a realistic value. While the US and Europe had become beneficiaries of drastic downward realignment of Asian currencies in 1997, the US also began to experience large trade deficit since the crisis.

Most Asian currencies were devalued to counter ChinaЎ¦s aggressive exchange rate policies and export promotion, but the US has not responded to these changes. Hence, the accumulation of a large trade deficit. Ever expanding US trade deficits is a tell-tale sign that the United States is now feeling the impact of ChinaЎ¦s devaluation in 1994. The US needs to adjust the yuan-dollar exchange rates (Scott and Blecker 12). Otherwise, the US will be forced to devalue dollar relative to yuan drastically, from the current rate.

In conclusion, trade deficits are nothing to fear if they are temporary. The market will balance the trade imbalance automatically by modifying exchange rate. Trade deficits may cause bad effects, such as, unemployment in the United States. However, it is temporary.

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