Government, Business, and International Perspectives

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In past years whenever globalization, international policies, or trade issues were discussed in the United States, Japan’s impact virtually dominated every component of any government, business, or social analysis. In more recent years the rapid economic transformation occurring in China has attracted attention on the magnitude of the Japanese explosion but, will surpass the Japan era of concern regarding what the nation must do from a political and business perspective to combat the Chinese onslaught.

The velocity, complexity, and swift movement of the Chinese economy is what dictates unprecedented issues for American government and business policies. Compounding these realities is the glaring fixation on the nation’s domestic woes, concerning the twin deficits, entitlement programs, healthcare cost, an eroding manufacturing base, and The War on Terror. These problems have resulted in financial implications that have proven to be costly and will continue to have adverse effects on the nation’s resources. The purpose of this paper is to analyze the Chinese-American relationship in terms of trade and economic policies.

It will examine key issues involving the economic and social histories of both nations, trade practices, and the political and social environment of the U. S. and China. The conclusion of this paper will present pertinent policies initiatives that would greatly enhance the competitive positioning of the U. S. in relation to trade and business China. These initiatives which will be supported by empirical information, and current data. The middle of the 20th century constituted the major beginnings of the on and off modern day economic relationship between the United States and China.

In 1947, the Republic of China was an original contracting party of the General Agreement on Tariffs and Trade (GATT). But the establishment of The People’s Republic of China (PRC) in 1949, under communist rule on the Chinese main land nullified the GATT events. (Rhodes and Jackson, 1999). Subsequently, the Chinese Nationalist Government forwarded a cable to the GATT headquarters in 1950, withdrawing China from the GATT and severing diplomatic relations with the West (Rhodes and Jackson, 1999 497).

After nearly thirty years of enstrangement, the United States and The People’s Republic of China officially reestablished full diplomatic relations in January of 1979 (Rhodes and Jackson 1999, 497). In July of that same year, the U. S. arranged a bilateral trade agreement with The People’s Republic of China, after a window dressing severance of ties with the Chinese Nationalist Government (Taiwan) in which trade and informal communications continued to flourish (Rhodes and Johnson, 1999). The restoring of diplomatic relations with China ushered in a new era for the U. S. which was precipitated by dismal economic and political woes of the 1970’s. During the 1970’s foreign political events traumatized the American economy significantly. In the Middle East, the oil embargo of 1973 and in the later 70’s, the fall of the Iranian Shah caused the quadrupling of world oil prices (Krugman, 1999, 59). Domestic government policies of wage and price controls spurred rampant inflation. This was followed by a reduction in federal spending and the government’s encouragement of the Federal Reserve Board (FED) to tighten credit and the money supply (Krugman, 1999, 59).

This caused unemployment to rise to shocking levels and resulted in the worst economic slump in the U. S. since the Roosevelt recession of 1937-38 (Heilbroner, and Singer, 1999, 304). The total factor of these events can positively be attributed to a time period that signified a brash need for government and business policies to provide a stimulus for economic growth in the U. S. Meanwhile events were occurring in China that would provide the cornerstone and foundation for a new foreign investment.

Deng Xiao Peng, chairman of the Communist National Party and China’s leader, announced major economic reforms in 1978, under his so-called “Open Door” policy. This was a slow reversal of the isolationist, anti-capitalist, economic autocratic ideology, that had governed the nation for nearly thirty years under China’s leader, Chairman Mao Tse Tung (Targowski, and Korth, 2003, 87). Chairman Deng prophetically proclaimed “to get rich is glorious” and a Chinese law was instituted by the government allowing foreigners to enter into joint ventures with Chinese companies (Targowski, and Korth, 2003, 87).

The U. S. government very much aware of the need for expanding markets, and increased trade avenues granted the People’s Republic of China most-favored nation (MFN) trade status in 1980 (Targowsk, and Korth, 2003 87). The evolution of international trade and the rudimentary concepts of economic globalization were obviously taking place in the trade policies of the U. S. government and business firms. During the Cold War and detente relations between the U. S. and China thrived. Both nations found themselves forged together against the Soviet Union (Sanghui, 2001, 9).

It was also during this period that the trade imbalance between the nations gave birth. In 1986, the U. S. had a trade deficit with China of $2. 8 billion and it was the year the PRC sent a delegation to Geneva with a formal request to join GATT. GATT was the organization that preceded the World Trade Organization (WTO), in which the PRC long desired to have membership (Firoz, and Maghrabi, 2003, 311). However, in 1989 the relationship soured in the wake of the Tianamen Square massacre, when the PRC government violently suppressed pro-democracy demonstrations (Sanghui, 2001, 9).

The U. S. withdrew its support for China’s accession to GATT, in the after of the Tianamen massacre, amid domestic political pressure (Rhodes and Jackson, 1999, 497). Congressional Democrats quite perturbed with the PRC’s assault on the pro-democracy movement urged former President George Bush to increase pressure on China to change its arm sales, human rights, and other policies. Particularly, Congress was in favor of joining the human rights issue with the PRC’s annually reviewed MFN trade status (Sanghui, 2001, 9).

The legislators wanted deadlines instituted in which China must comply in improving its human rights issues, or lose MFN status and face high tariffs on exports to the United States (Sanghui, 2001, 9). It was not until Bill Clinton became President of the United States that linking was ultimately implemented in 1993, and the policy proved to be horrendous. The Chinese government considered the U. S. policy as an act of direct provocation and responded by incarcerating a number of prominent dissidents (Sanghui, 2001, 9).

Clinton was compelled to reverse his policy and trade status and human rights issues were delinked in 1994 (Sanghui, 2001, 9). The U. S. as a capitalist and democratic nation operates with free markets within a market economy. The PRC however, functions in a non-market economy, in which the government has a powerful influence in production cost and the final price of products (Firoz and Maghrabi, 2003, 311). Furthermore, the Chinese government provides some firms with subsidies, and tax incentives that makes foreign competitors, have significant disadvantages (Firoz, and Maghrabi, 2003, 311).

The U. S. herefore, ascertains that this policy enables China to sell its products at prices well below their normal value and considers this as dumping, which is condemned by the WTO (Firoz, and Magrabi, 2003, 311). The Chinese contend however, that this a competitive advantage of their nation due to low labor cost and the fact that they do not have to comply with stringent environmental standards (Firoz, and Maghrabi, 2003, 311). When dealing with a non-market economy according to U. S. antidumping regulations, the price of the good in question must be used from a comparable market economy (Firoz, and Maghrabi, 2003, 311).

The U. S. considers China a non-market economy therefore, this has affected trade tremendously. Since 1979, scores of dumping charges have been leveled against China. In March of 2000, in a highly publicized case, the U. S. Department of Commerce after investigation levied antidumping duties ranging from 24 percent to 119 percent on Chinese steel cable imports (Firoz, and Marhrabi, 2003, 311). The U. S. International Trade Commission later in the year suspended investigating the case without implementing antidumping measures.

No evidence was gathered by the Commission, that suggested the Chinese steel cables had done significant damage or presented the threat of damage to the U. S. steel cable industry (Firoz, and Maghrabi, 311 2003). It was decided that different methods for price computation had been used by the Chinese, and the Commerce Department agreed to accept the PRC’s arguments but, still maintained that Chinese firms had dumped steel cable in the U. S. market. Prior to this case, China had implemented its own antidumping regulations in 1997 due to increased globalization and its attempt to join the WTO (Firoz, and Maghrabi, 2003, 311).

The PRC removed some import quotas and reduced non-tariff and tariff barriers therefore, the laws were enacted to protect domestic industries from dumping (Firoz and Maghrabi, 2003, 311). In April of 1999, Chinese Premier, Zhu Rongji went to Washington, D. C. equipped with a deal for the U. S. , that contained major changes his nation would undertake to ensure its accession to the WTO but, the Clinton Administration rejected the offer (Firoz, and Maghrabi, 2003, 311). After the accidental bombing by NATO forces of the Chinese embassy in Belgrade, that suspended negotiations indefinitely, the U. S. overnment quickly realized it had made a mistake (Firoz and Maghrabi, 2003, 311).

A U. S. trade representative traveled to Beijing, and a bilateral agreement was signed between the nations in November of 1999. Although trade between the nations was already moving at a brisk pace, the bilateral agreement contained important concessions by China that was purported to be a help for U. S. exports and slow the mounting trade deficit with the PRC. By 2001, the U. S. trade deficit was over $80 billion with China, and had gradually been transformed into a more complex economic relationship molded by increasing U. S. foreign direct investment (FDI), and sales by U. S. foreign affiliates in China (Quinlan, 2002, 116). U. S. affiliates operating in China had become the way of choice to deliver products to the Chinese market rather than by direct export from the U. S. As a result of this, U. S. export figures which do not include affiliates sales, understated the real level of commercial involvement between the nations (Quinlan, 2002, 116).

To gain excess to the mainland’s large untapped consumer market, U. S. multinationals entered China. The U. S. ultinational operating in China in the early 1990’s did so to overcome high transportation cost, stiff tariffs, and other Chinese policies that discriminated against trade (Quinlan, 2002, 116). In 1990, total assets of U. S. multinationals operating in China were $2. 1 billion and grew to nearly $33 billion by 1999, and the number of U. S. majority owned foreign affiliates exploded from 45 to over 450 in the same period (Quinlan, 2002, 116). It is quite interesting to note also, that the export of U. S. goods and services grew immensely over the same period by roughly 220 percent.

U. S. multinationals firm not only saw China as market seeking investments but, as efficiency seeking operations due to low-cost labor, falling transportation cost, and liberal economic policies that allowed firms to outsource many functions, and transfer many activities to their affiliates (Quinlan, 2002, 116). According to the U. S. Bureau of Economic Analysis (BEA), U. S. affiliate sales to the local Chinese market rose more then fivefold between 1994 and 1999, and affiliate exports to the United States rose more than twelve fold, climbing to $2. billion in 1999 (Quinlan, 2003, 116).

It is quite relevant that one realize China is now a source of considerable earnings for many U. S. firms and this income comes back to the U. S. but, there are other economic policies that have also been a stimulus to the trade deficit. Since 1994, China has pegged its currency (yuan) to the U. S. dollar, amid much contention from U. S. politicians, political action committees (PACS) unions and business (Lardy, 2003). There is a broad consensus and very little doubt that the Chinese currency is undervalued.

The Chinese authorities, by their past measures undertaken, have implicitly acknowledged that the yuan is undervalued (Lardy, 2003). The U. S. government has over the years consistently urged the Chinese to adopt a more flexible exchange rate system. According to Morris Goldstein of the Institute for International Economics, a 20 percent reevaluation of the yuan would reduce China’s current account position by about US $40 billion, which means that imports would increase and exports would decrease by an amount summing to $US 40 billion (Lardy, 2003).

Goldstein further contends that price effects of an exchange rate – change work through the markets and has lags, and the US $10 billion would probably be reflected in a rate at which the trade imbalances grows, opposed to a reduction in the absolute size of the deficit (Lardy, 2003). There is also belief that a Chinese reevaluation would have a positive affect on the total U. S. current account much larger than the influence on the bilateral trade balance, because China may be the key to an overall realignment of Asian currencies due to its increasing competitiveness as a global exporter (Lardy, 2003).

It must also be noted that the U. S. trade imbalance with the PRC is also influenced by other Asian countries that have chosen China as the leading location for the assembly of manufactured goods, previously assembled elsewhere in Asia (Lardy, 2003). This factor had a direct impact on the U. S. – China bilateral deficit and helped it to grow from US $10 billion in 1985 to over US $100 billion in 2002, and the same period saw China’s exports produced by foreign businesses rise from 1 percent to 52 percent (Lardy, 2003).

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