Sample Critical Thinking Paper on US trade deficit with China

US trade deficit with China.

The US trade deficit with China has been a politically charged issue and public debates on the topic have tended to give out more heat than light. Politicians on the campaign trail have made an art of attacking China and promising to impose tough trade sanctions when in power. Any news of the trade deficit ‘crisis’ is greeted with increased protectionism rhetoric from political leaders who want to be seen to be doing something about the problem.  In the last US presidential election, China became an election bogeyman with each of the candidates promising to take an uncompromising stand against perceived Chinese trade malpractices once they got into office (Dorn). A climate of distrust and outright hostility towards China exists within the American society, with China being seen as a cause of the US economic woes (Brown 54). Failure of the US economy to recover quickly after the recent economic recession has been blamed on Chinese currency manipulation that has made it difficult for US goods to be competitive in the global market. However, a trade deficit is not necessarily bad for the economy and stringent action against China is inimical to the US’ long term interests.

Before president Nixon visited China in 1971, there was minimal commercial contact between the US and China and the Chinese economy was generally insulated from the world economy (Wang 166). Developments in the world economy had a minimal effect on the Chinese economy, and similarly, developments in the Chinese market had no discernable effect on the world economy. However, this situation has drastically changed over the intervening years such that when the Shanghai stock market lost 9% of its value, major stock markets around the world lost substantial value in response to the Chinese market crash (Wang 167). Trade between the US and China has also changed over the last three decades from around US$ 2 billion in 1979 to over US$ 500 billion in 2013 (Morrison 1). The table below shows that the US-China trade deficit has increased from a couple of billions in 1990 to over US$ 300 billion (Morrison 3)

Table 1. U.S. Merchandise Trade with China:

1980-2013 and Protections for 2014

($ billions)

Year                U.S. Exports U.S. Imports   U.S. Trade Balance

1980                3.8                   1.1                   2.7

1990                4.8                   15.2                 -10.4

2000                16.3                 100.1               -83.8

2005                41.8                 243.5               -201.6

2006                55.2                 287.8               -232.5

2007                65.2 3              21.5                 -256.3

2008                71.5                 337.8               -266.3

2009                69.6                296.4               -226.8

2010                91.9                 364.9               -273.1

2011                103.9               393.3               -295.5

2012                110.6               425.6               -315.0

2013                121.7               440.4               -318.4

2014 (estimate) 131.2                         460.2               -329.0

Source: U.S. International Trade Commission DataWeb.

Note: Projections for 2014 made using actual data for January-May 2014.

Scott argues that the growing trade deficit between the US and China has led to massive job losses across the US, especially in the manufacturing sector which has suffered the brunt of migrating capital. The Chinese government has been accused of currency manipulation because it uses an opaque system to price the currency and insulates it from market forces. Currency manipulation is one of the causes of the burgeoning trade deficit because it enables the Chinese government to keep its currency far below the market value hence making Chinese exports much cheaper and very competitive in the world market (Brown 55). In addition, the Chinese government practices like subsidizing of industry distort the market and give their companies unfair advantage. However, a focus on currency manipulation or Chinese unfair trade practices does not in itself explain the growing trade deficit.

An analysis of the trade deficit shows that their causes are more complex and cannot be merely attributed to the Chinese government interference. Xu (7) identifies a number of factors contributing to the rising US-China deficit. American multinationals have contributed significantly to the growing deficit as they seek to increase their profits and return value to their shareholders. For example, companies like apple have outsourced the assembling of their phones to China, giving the false impression that apple phones are manufactured in China. In reality, only the low value, labor intensive work of assembling is done in China. High value parts are manufactured elsewhere and the Chinese factories have very little addition on the manufacturing process. The low labor costs in China help the multinationals to significantly lower the production costs for their products, and pass some of these benefits to the consumers in form of lower product prices. Therefore, even though the cost price of the final product is attributed to China, in reality, the money goes to different parts of the world where the parts are manufactured. Outsourcing of labor intensive work enables the US to create high value jobs for its citizens hence enabling the economy to keep growing.

The effect of the trade deficit on the US economy may be overstated because reducing the deficit will not lead to an even distribution of benefits across all sectors of the economy (Morrison and Labonte 31). China as a country has become the world’s factory, assembling and manufacturing goods at cost-efficient prices that cannot be easily matched in America. Pressuring the country to revalue its currency may have a detrimental effect to the American economy since the Chinese economy is weak and does not have enough internal capacity to absorb the goods and services it produces. Therefore, although the US will be able to produce goods at relatively competitive prices, the export market for these goods in China is very limited. Lower economic growth in the country due to reduced exports will lead to diminished demand for imports. Consequently, the US exporters will not find an adequate market for their products hence affecting their profitability. In addition, raising the costs of Chinese products will not be necessarily beneficial to the US economy. The extra costs will be passed to the consumers decreasing the real wealth and wages in America and likely leading to an increase in interest rates.

The US-China trade deficit is a complex issue which unfortunately has been mainly portrayed in the mainstream media as a case of the US getting tough on an errant country. The Chinese and American economies are interlinked and dependent on each other for sustained growth and prosperity. China holds a significant amount of US Treasury securities, which the federal government uses to finance budgetary deficits (Morrison 13). Currently, among foreign nations, China holds the largest amount of US Treasury securities; helping to keep the US interest rates down and enabling the US government meet its fiscal obligations. Tackling the deficit issue requires a change in the US culture and mentality. Most of the deficit is caused by excessive domestic consumption and poor saving habits among US citizens. Demand for foreign goods can only reduce if Americans decide to save and significantly cut back on consumption


Brown, Joshua. “Us-China trade imbalance: the economic, political, and legal implications of            Chinese currency manipulation.” International law & management review 9.1 (2013):53-   79. Print.

Dorn, James. “China looms large in U.S. presidential campaign.” CATO Institute 3 November       2011. Web. 21 September 2014.

Morrison, Wayne and Labonte Marc. “China’s currency policy: an analysis of the economic        issues.” Congressional Research Service 22 July 2013. Web. 21 September 2014.

Morrison, Wayne. “China-US trade issues.” Congressional Research Service 10 July 2014. Web.     21 September 2014.

Scott, Robert. “Growing U.S. trade deficit with China cost 2.8 million jobs between 2001 and         2010.” Economic Policy Institute 20 September 2011. Web. 21 September 2014.

Wang, Dong. “China’s trade relations with the United States in perspective. Journal of Current       Chinese Affairs, 39.3 (2010): 165-210. Print.

Xu, Xiaoping. “Rethinking the China-US balance of trade: 1990-2005.” iBusiness 4.1 (2012).            Web. 21 September 2014.