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

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. Although US-China economic relations have been troubled in the past, there is little reason to believe that China’s economic ascendancy presents a threat to the US economy. On the contrary, strong growth in China has a positive net impact on the US economy and expanding trade with China in the future will provide the US with more benefits than costs.

As China’s integration into the world economy proceeds, one key long-term impact will be through terms-of-trade effects. Bilateral trade between the United States and China in 2003 totaled 181 billion dollars, growing at an annual average of slightly over 17 percent since 1991 when overall trade amounted to only 21 billion dollars (Figure 2). While both American exports to and imports from China have increased in tandem, the latter has largely exceeded the former ensuring that China has enjoyed a persistent bilateral trade surplus with the United States. American purchases of Chinese goods have risen by more than 50 per cent since 2000, reaching 152 billion dollars in 2003. As a result, the US merchandise trade deficit with China hit 124 billion dollars in 2003, and this large bilateral deficit has been the cause of much criticism in the United States. Some manufacturing industries claim that imports from China hurt their industry and decrease jobs. Because of strong Chinese competition, US manufacturers have faced reduced demand for their products in recent years and therefore have been compelled to reduce output and employment. Although such accusations are not utterly deprived of merit, they have also been largely overstated.

First, a big statistical discrepancy exists between the US and Chinese estimates of the trade deficit. For instance, the US government calculated the 2002 deficit at 103 billion dollars while China computed it at 43 billion. Several reasons for these differences have been identified. Most notably, over 70 percent of China’s exports to the US consist of reprocessed goods - goods that have only been assembled in China while intermediate production has occurred in other countries. Therefore, American statistics are likely to be persistently overestimating the real volume of Chinese imports.

Second, the US large bilateral deficit with China should ...