The Law of Comparative Advantage Implications for the Us – China Trade Relationship

The law of comparative advantage: Implications for the US – China trade relationship

Bellevue University

Objectives/problem definition

• To explain the law of comparative advantage

• Define the US – Chinese trade relationship from a historic context

• Identify how US and China have benefitted from trade as well as those who have been affected adversely

• Explore current US and Chinese domestic and trade policy

• Provide strategic recommendations for managers and policy makers moving forward

Law of comparative advantage

• Law of Comparative Advantages was first formulated by David Ricardo

• If each country would focus on the products in which they were most efficient in producing and trading for the products they were least efficient

• Then both countries would maximize their production and improve the welfare of their people

• While trade will produce a net benefit to each country,  there are those who are adversely affected.

• According to the Stolper-Samuelson Theorem, trade will make low-wage unskilled workers worse off (Deardorf1997)

• Free trade has contributed to rising inequality among American workers

• However,  social policies can be devised to assure the benefits of free trade are enjoyed by all (Deardorf 1997)

US-China trade HISTORY

Relationship prior to China entering World Trade Organization

• Off and on trade relationship since Trade Agreement of 1844

• US began offers aid to China during World War II

• US held distinct advantage in trade over China

• Nixon Administration

• Clinton sign’s U.S.-China Relations Act of 2000

US-China trade HISTORY

Relationship after China entered the World Trade Organization

• China joins World Trade Organization in 2001

• China’s rise in trade with the United States

• Comparative advantage turns in China’s favor

US-China trade deficit

• $83 Billion in 2001 to $310 Billion in 2012

• US has been running trade deficits with the rest of the world for more than 30 years

• Unique advantage = US Dollar

• If not the exchange rate – then what?

US-China Trade  - why china?

Several determinates have been identified:

• Relocation of exports to China from elsewhere in Asia

• Measurement differences

• Overcounting Chinese exports to the U.S.

• Undercounting U.S. exports to China

• Americans consuming but not saving

• U.S. restrictions on high-tech exports to China

U.S. –China Trade deficit

Will the U.S. Trade Deficit ever go away?

US Economic state and structure 1

Market oriented

• “Free enterprise”

• Flexibility

• Government protection

2014 “strongest year for labor market recovery…”

US Economic state and structure 2 (Policy)

Economic Policy

• Monetary

• Federal Reserve System

• High = Stimulate Borrowing

• Low = Slow Borrowing

• Fiscal

• Raising Money

• Spending Money

China Economic state and structure 1

The ‘World’s Factory’

• Capitalist Market Principles

• State-Owned Enterprises

“One Road, One Belt”

• Strong Networking Force

• Efficiency

• Catching up

China Economic state and structure 2 (Policy)

The “New Normal”

• Economic Reform

• “Going Global”

Strategic recommendations for managers

• Increase exports in general

• Renewed focus on innovation

• Reward innovation

• Hire for talent

• Continue to develop your human capital

• You must create new competitive advantages

Strategic recommendations for policy makers

• Implement policy for displaced workers, provide for reeducation and training

• Renewed investment and focus on quality, affordability, and availability of education

• Promote/encourage international trade for SMEs

• Assure financing is available

• Provide corporate education on domestic and foreign policies

• Assist with marketing of US products to international markets

• Additional pressure for China to reduce protectionist policies

References

Deardorff, Alan V.  (1997) Benefits and costs of following comparative advantage. Retrieved from    

         http://fordschool.umich.edu/rsie/workingpapers/Papers401-425/r423.PDF

EW World Economy Team. 2 Jun 2013. Economy Watch. US Economic Structure. Retrieved from

         http://www.economywatch.com/world_economy/usa/structure-of-economy.html

Lin, J. Y., & Wang, Y. (2015). China’s contribution to development cooperation: ideas, opportunities and finances. Development, 119.  Retrieved         from http://www.ferdi.fr/sites/www.ferdi.fr/files/publication/fichiers/wp119_lin-wang_paper_for_ferdi_web_2.pdf

Schell, O., & Chovanek, P. (2013). U.S.-China economic relations what will the next decade bring? Asia Society. 

        Retrieved from http://www.chinafile.com/conversation/us-china-economic-relations-what-will-next-decade-bring

Tang, Y., Zhang, Y., & Findlay, C. (2013). What explains china's rising trade in services? Chinese Economy, 46(6), 7-31.         doi:10.2753/CES1097-        1475460601 Retrieved from http://ezproxy.bellevue.edu:80/login?url=http://search.ebscohost.com

        /login.aspx?direct=true&db=bth&AN=95012384&site=ehost-live

References

The Daily Star. 09 Nov 2014. China Presses on With New Silk Road Plan.

        http://www.thedailystar.net/china-presses-on-with-new-silk-road-plan-49386

The Diplomat. China Power. China Sets Economic Reform Targets for 2015. 12 Dec 2014.

        http://thediplomat.com/2014/12/china-sets-economic-reform-targets-for-2015/

US Department of Commerce: Bureau of Economic Analysis. 30 Jan 2015.

       http://www.bea.gov/newsreleases/national/gdp/gdp_glance.htm

US History.org. 2015. American Government. Policy Making: Political Interactions.

        http://www.ushistory.org/gov/11c.asp

Yue, K., & Zhang, K. H. (2013). How Much Does China's Exchange Rate Affect the U.S. Trade Deficit?. Chinese         Economy, 46(6), 80-93. doi:10.2753/CES1097-1475460605