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The Effects of China's Rapid Growth on the US Economy

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Introduction

The Effects of China's Rapid Growth on the US Economy Since the initiation of economic reforms in 1979, China has become one of the world's biggest and fastest growing economies. Between 1979 and 2003, the growth rate of real gross domestic product (GDP) averaged 9.3 percent per annum (Figure 1). Trade and investment reforms in the early 1990s opened the Chinese economy to large flows of foreign direct investment (FDI) and established China as the fourth-largest trader in the world. China's continued emergence as an economic power in Asia has posed a number of complex questions to US policy makers over the effects of China's rapid growth on the American and global economies: What opportunities will the growth and liberalization of Chinese markets likely bring to developed and developing countries? How will the increase in the export competitiveness of Chinese products affect world markets? Who will gain? Who will lose? In my opinion, while the effects of China's increasing economic weight and integration into the world economy are likely to prove positive for the United States overall, the impact could vary greatly across different industrial sectors and socioeconomic groups. For instance, while China's demand for American skill- and technology-intensive items is likely to increase in the future, certain sectors in the US may undergo job losses as Chinese firms become more competitive and expand their market shares. ...read more.

Middle

Therefore, Chinese imports do not create as much job loss in the United States since the United States became a net importer of such goods long before China emerged as a world trader. For that reason, Nicholas Lardy concludes, "the argument that the growing deficit with China has caused a large loss of manufacturing jobs in the United States is wrong."3 In addition, low-priced Chinese imports benefit US consumers since they are able to buy toys, clothing, plastic goods and home appliances at a much lower cost than they would be able to buy without imports from China. Third, since 1990 China has been the fastest expanding market for US exports, growing at an annual average of 17 percent per year. In fact, while US exports to the world excluding China fell after 2000, US exports to China expanded at an unprecedented rate (Figure 5). In 2003 exports to China reached 28.5 billion dollars, making China the sixth largest purchaser of US exports in the world. Currently, China is the fastest growing market for technology-intensive goods, such as aircraft, computers, and semi-conductors, in which the US economy has a strong comparative advantage. As China continues to grow at a torrid pace in the future, its demand for American imports will grow as well, and Chinese markets will become increasingly important for many US firms. ...read more.

Conclusion

In addition, given the low correlation between China's business cycle and the business cycles of the big industrialized countries, China's rising share in world output may help dampen cyclical swings in the global economy7. On the other hand, China's expanding demand for raw materials to sustain its growing economy will put an upward pressure on world commodity prices in the future and countries that are large net importers of these commodities may experience a rise in inflation8. In my opinion, China's rapid emergence, like a number of other external shocks, will have complex, multifaceted effects on the US economy. In particular, the United States can benefit from labor-intensive imports, as well as from greater demand for its capital-intensive exports. Because of the significant complementarity between the US and Chinese economies, the mutual gains from free trade between the two countries will be considerable. However, this complementarity is neither perfect nor static and China's increasing competitive pressures will hurt certain sectors in the US economy. As resources move toward more productive areas, transitional difficulties will inevitably occur and US-China trade relations are likely to remain contentious in the future. Although China's rapid emergence presents both opportunities and problems to the United States, I think the long-term benefits for the US economy will outweigh greatly the near-term costs. ...read more.

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