1. Trade Between the Eagle and the Dragon:
A Comprehensive Analysis of U.S. and Chinese Trade Relations
Matthew T. Laidlaw
Professor Ahmad
Political Economies
02 December 2010

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Matthew T. Laidlaw
Professor Ahmad
Political Economies
02 December 2010
Trade between the Eagle and the Dragon
The U.S. and Chinese government have experienced a mixed trade relationship.
On one hand the U.S. consumer has enjoyed cheap manufactured goods that
competitively rival the more expensive goods of the U.S. manufacturers. Yet the U.S. has
also experienced the negatives associations of higher unemployment brought about
through decreased manufacturing opportunities within the U.S. Along with these two
distinctions, the Chinese and the U.S. have both been strained by the tensions brought
about during the Cold War as well as the tensions brought about through China’s
adoption of Communism during the Post-WWII era. Despite these historical conflicts,
U.S. and Chinese trade has expanded rapidly.
In fact the two nations have become so interconnected, that either would
inevitable suffer as the other does. The U.S. has so greatly expanded its role of
globalization that its economic security is greatly dependent on nations such as China.
U.S. economic security has become so dependent on exports to less developed nations
that in 1978 less developed countries accounted for 29% of all manufactured exports. By
1990 this number had risen to 36.4%. Of this percentage of manufacturing exports, nine
nations (China, Hong Kong, Korea, Malaysia, Singapore, Thailand, Mexico, Brazil, and
Taiwan), accounted for 79% of this growth (Sachs, Shatz, Deardorff, Hall p 1).
The Chinese have even greater vested interest in the economic abilities of the

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U.S.. A large portion of the Chinese economy rests entirely upon the U.S. consumer. If
the American consumer suffers as a result of economic events, the Chinese then suffer.
If U.S. consumers suffer economically, they in turn purchase less Chinese products.
The Chinese have attempted for many years, to create demand within their own nation
but have struggled. As such the U.S. consumer base has appeared as a far more attractive
market.
Growth Since the Cold War Era and China’s Emergence into the WTO
In July of 1979, the U.S. and Chinese re-established trade relations by signing a
bilateral trade agreement. Since the signatures of both nations, the two have seen
widespread trade growth. In 1980 the U.S. signed to give the Chinese Most Favored
Nation status. As a result the Chinese began to export massive amounts of manufactured
goods (Morrison pg 2-6).
Since 1979, the Chinese have begun to implement many national reforms
including trade liberalization and many changes in in order to be recognized by the World
Trade Organization. During these changes to become a member of the WTO, China
lowered its tariff rates to 8.9% for industrial goods and 15% for agricultural goods
(Morrison 16-18).
China also limited agricultural subsidies as well and completely eliminated
subsidies for exported agricultural products. It granted trade rights to foreign enterprises.
It also vowed to treat WTO member nation’s investments with non-discriminatory
treatment. These firms would be treated the same way as a Chinese firm would be. It also
agreed to the WTO’s intellectual property rights agreements (Morrison 17-18).
Predictions of Future Trade Growth

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The Chinese economy has seen massive growth rates over the past decades. In
1978 total trade in manufacturing goods were roughly $0.5 Billion. By 1990 this number
rose to $17.5 Billion (Sachs, Shatz, Deardorff, Hall p 52-53). And in all trade sectors the
numbers have risen from $5 Billion in 1980 to $409 Billion in 2008 (Morrison p 1). It is
predicted that if current trends continue, U.S. and Chinese trade will grow by 16.1 % a
year (Sachs, Shatz, Deardorff, Hall p 55)
Despite this growth, the Chinese economy rests upon the basis of its low wage
manufacturing sector. As a result internal demand remains relatively low and will
continue to do so without a more direct wage increase. Without wage increases, trade
with the U.S. should continue to rapidly grow.
If however the Chinese beings to increase wages to its manufacturing sector, one
would expect to see lower growth rates of trade with the U.S. As wages increase, the
price of manufactured goods also increase. As these prices increase, demand from the
U.S. decreases. This possibility of wage increase would however tend to improve internal
demand. As workers make more, they tend to spend more. This model of demand works
well when comparing most Western nations.
Despite this example of the West, the Chinese economy does not respond in the
same way. The Chinese economy is built upon low wages as well as high private savings.
As workers in China make more money, they tend to save more money. If this money is
saved, little demand is created and unemployment rises. It is because of this cultural
distinction between the U.S. and China; that the two economies have become so closely
intertwined together. The Chinese must look to the U.S. for sales and the U.S. must look
to the Chinese for their cheap products.

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Despite this dependency the U.S. has attempted to return once again to a more
independent approach towards Chinese products. Currently the possible adoption of a
lower currency rate by the U.S., appears to be the largest possible factor leading to
slowed trade growth between the U.S. and China. The Chinese have been able to
maintain relatively strong employment rates as well as produce cheap products, partially
as a result of their artificially low currency rate. It is because of these two emphasizes
that China and the U.S. have so successfully traded and grown more intertwined.
Despite this trade growth many politicians are emphasizing reform when dealing
with the Chinese currency rates. As of 2008 the Chinese had a $250 Billion trade surplus
with the U.S. As such many in D.C. are clamoring for economic reform. Many politicians
fell that by either lowering the value of the dollar when compared to the Yuan or
economically forcing the Chinese to raise the value of their own currency; Chinese
exports to the U.S. will decrease. As such demand for U.S. exports will increase as well
as internal demand for U.S. products (Hale, Hale p. 57).
This however would create great economic strain on the Chinese and therefore
incur damage to the U.S.. Much of the U.S.’s imports rely upon the Chinese. If the value
of the Yuan increases, Chinese products become more expensive. Many businesses and
factories would suffer if the Chinese products they rely upon increase in price. Many of
the U.S.’s factories would see increased production and business, but the time it would
take to produce the infrastructure needed to remodel our economic system would take
time, time that many businesses do not have.
Furthermore the Chinese economy would greatly suffer. Many Chinese
companies rely upon our current economic model of exchange. As such many of these

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firms would close. Without these firms many U.S. firms would also lose business as their
Chinese consumers lose money.
As the value of the Yuan increases to the dollar, U.S. foreign investment in China
would also decrease. American investment into China would cost more, as such
expansion of factories into China would decrease. As a result many U.S. firms would
have to decrease expansion projects already established in China as well as lay off
workers. As workers lose their jobs, internal and external demand decreases. Decreased
demand leads to decreased sales, which leads to decreased manufacturing; which again
leads to decreased employment. Both economies are so reliant upon one another that
destabilization of currency or trade relations, causes severe economic distortion.
The Global Financial Crisis
The financial crisis of the 2000’s created trade distributions between the U.S. and
China. The financial crisis trimmed the trade deficit of the U.S., yet it has also
encouraged more intervention from Congress to reform economic policies.
As a result of the struggled economy, the U.S. Congress has scrambled to “fix”
the problem, as such many senators and representatives have emphasized our dependency
on China as the core of the problem. These congressmen argue that our dependency on
China has created massive outflows of wealth from the U.S. to China, and that this
dependency is the cause of unprecedented Chinese growth rates.
This protectionist sentiment has escalated with “Buy America” legislation in the
recent stimulus package. This legislation gives biased aid to American companies that
purchase American made goods; such as tax breaks, subsidies, etc. This legislation has
also created tense trade relations with the Chinese, who have crafted their own “Buy

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China” legislation in their own stimulus bill. This in turn has hurt many American
companies in the same way “Buy American” legislation hurt the Chinese.
The argument made by “Buy American” legislatures, seems to be that we have
grown to dependent on the Chinese. As such many believe the current crisis could have
been avoided, had the U.S. not been so dependent on the Chinese. Many believe that the
Chinese have made massive profits and therefore been able to create massive growth on
the grounds of economic struggles of the U.S. (Prasad 2009).
The problem with this argument is however; the fact that China has also struggled
greatly due to the current financial crisis. The Chinese economy relies upon its exports.
Without expanded exports, China will be unable to maintain its growth. When its trade
partners struggle, just as the U.S. and most of the world has; China’s exports decrease,
because foreign costumers cannot afford them.
China has so much vested foreign investment in the states, that any economic
failings in the U.S., also harms the Chinese; and vice versa for U.S. foreign investments
in China. The current protectionist sentiments growing as a result of the financial crisis
only act as counter-productive, as business stability between the nations becomes
interrupted. Companies throughout both nations cannot grow if they doubt their abilities
to expand in a market, because of local governmental aid to their competitor(s).
It has even been argued that the current financial crisis was directly caused by the
growing protectionist sentiments of the U.S. and China. As nations with huge deficits
such as the U.S. began to borrow from nations such as China, Asian consumers saved
their money out of fear of failure in foreign or direct domestic investments. These
“savers” feared that as a result of protectionist aid in invested nations deficit nations, that

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they would lose their investments. Because of this fear these prior investors became
savers and did not spend money as they had, but instead saved massive amounts of
money. Most of these lender Asian nations did not have the financial market capabilities
of the West, such as banks and lending centers. As such the money became pooled in
U.S.’s established financial sector and U.S. banks. These U.S. banks in turn received
huge amounts of money from Asian savers.
These banks had huge amounts of money and were able to give out lots of loans at
relatively low interest rates. This created a situation in which consumers saved little
money and loans were more easily given to unstable borrowers. These borrowers were
unable to pay back their loans. In turn these firms were unable to withstand the massive
outflows of money that ensued and these huge financial centers collapsed.
Had protectionist sentiments been avoided, it is believed that these Asian lending
nations would have instead “spent” their money rather than saved it. In turn the money
would have been invested in the market or domestic growth, as well as direct foreign
investment through business transactions rather than bank lending.
U.S. Deficits and Chinese Trade Surpluses
Another point of trade contention between the U.S. and China has become the
U.S.’s rising financial deficient. As of 2008 Chinese holdings of U.S. Treasury Securities
fell around $700 Billion. This deficient is further increased when Chinese holdings in
U.S. aided third world counties are compounded. In truth the U.S. actually owes another
$150-200 Billion to China; based upon its promises of aid to developing nations (Prasad
2009).
This deficient has further sparked protectionist sentiments by U.S. citizens. It has

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also given the Chinese unprecedented influence over U.S. policy decisions. The U.S.
must be cautious in the policy decisions it makes while the deficit is so heavily controlled
by the Chinese. These “cautions” must extend to U.S. policy when dealing with the
possibility of undervaluing the dollar when compared to the Yuan as well as U.S.
protectionist legislation.
The U.S. and Chinese Future Energy Crisis
The Chinese have grown at unprecedented rates over the past few decades since
the Cold war Era. As a result the Chinese have placed greater strain on not only product
competition with the U.S., but also energy allocation and finite resources. These finite
resources include materials such as copper, nickel, iron and aluminum; as well as fossil
fuels such as oil and natural gas.
The Chinese need vast amounts of these resources and the need only becomes
greater every year. In 1990 China accounted for 7% of the worlds copper, nickel, iron,
and aluminum needs. By 2000 the accounted for over 15%. Today that need has grown to
over 20% and it is predicted to increase by at least double within the coming decade. The
Chinese have also been large importers of oil. As of 2004 the Chinese accounted for 31
% of global energy demands and this need has only continued to grow (Zweig,Jianhai
p25-26).
As a result of this growth it has become increasingly more important for the world
to regulate China’s economic impact. It also means that it has become increasingly
difficult for U.S. companies to bargain for the same finite resources. The demand has
grown on these resources as such so has the price. This demand becomes increasingly
more difficult to achieve as the resource stocks dwindle as all finite energies do.

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As such conflict between the U.S. and China on energy reform, becomes
inevitable. As both nations compete for the same resources tensions rise and economic
growth rates face risk. This possibility becomes even more compounded for the U.S.
when the policy decisions the U.S. makes must be weighed alongside the rising deficit
decisions.
This lack of energy resources also places the U.S. in stark national security
possibilities. How can the U.S. sustain military strength and protection; when resources
become thin and economic troubles arise? Furthermore, how can the U.S. attain national
interests, if so much of the U.S. economy is bounded by foreign entities such as the
Chinese?
Conflict seems inevitable, unless the U.S. and Chinese can achieve trade policies
that not only benefit both, but also begin to work towards “green” possibilities. The
Chinese government has made large bounds in the area of “green” technology; as such
they appear to be on the cutting edge when it comes to possible future trade capabilities.
Currently China has been on the cutting edge in wind technology. From
2006-2009, China was able to consecutively double their wind turbine output of the
nation every single consecutive year. It is also predicted that if the Chinese continue these
investments, the nation could be the largest supplier of wind energy in the world, as well
as the largest supplier of wind based energy technology (China's wind-power potential p
1). This investment in renewable energy could give the Chinese economy unprecedented
competitiveness over the U.S. in terms of energy capabilities, unless the U.S. is able to
also reform its sustainable energy capabilities.
Despite the possible abilities created through “green” energy, by the Chinese

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government; trade relations have become strained. The Chinese have passed legislative
practices that only implement “green” technology if the company that produced it is 51%
or more Chinese own.
As a result of this legislation many nations feel that the Chinese have violated the
charters of the WTO as well diminished the capabilities of the Kyoto Treaty. The Chinese
have a possibility of creating vast amounts of “green” technology which they can in turn
export to the rest of the world. Despite this they may in turn create a situation through
which their own protectionist sentiments stir protectionism in other nations; including the
U.S. If this is the case, China may lose out on exporting their “green” technology to other
nations (China's Wind-Power Potential p 1).
In order to continue to compete with the Chinese, the U.S. must start to invest
more heavily in alternative fuels and “green” technology. If finite fuels continue to
deplete, these alternatives will be necessary. If the U.S. waits until an energy” crisis, then
the Chinese will have a huge economic and competitive advantage. “Green” technology
will be the future of economic growth. Without this competitive advantage the U.S. will
struggle in all sectors of the economy. Finite fuels will become more expensive, as such
so will products. Whereas a renewable energy based economy will be able to limit rising
prices as they will rely far less on finite fuels. Furthermore the nations that become
renewable based energy economies will be able to sell their excess energy capabilities
across the world and make huge profits. These economies will also be the driving force
behind future globalization policy, as other nations rely upon their nation’s strengths.
Conclusion
The U.S. and China both gain from the trade growth exhibited in both nations. As

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such both nations should avoid legislation and policy decisions that lead to protectionist
sentiments. These sentiments only discourage competition and instead create stagnation,
inefficiency of the market, increased product prices, and market instability.
Instead both nations should encourage a free market enterprise that works to
create competition among Chinese and American firms. The U.S. should encourage
policies that make the U.S. a more competitive nation rather than create protectionist
policies. Invest in domestic education to make the American worker more competitive.
Invest in infrastructure to make the U.S. more appealing to companies and Multinational
Corporations. Invest in renewable energy programs that encourage a more efficient
energy system as well as market stability as these resources remain more constant than
their finite counterparts.
The Chinese should also pursue these same policies. They should work to
maintain strong relations with the U.S., in order to encourage export growths. They
should also continue to encourage internal demand as a way to not only stabilize their
own market systems, but also encourage more foreign investment as companies look to
pursue Chinese consumers.
The Chinese and the U.S. should both discourage lowering the value of the dollar
compared to the Yuan. As this would only create market stability and aggravate trade
relations. This would also create further hostility with the Chinese in the discussion of the
U.S. financial deficit.
The stability of the U.S. and Chinese trade market only creates growth and
prosperity for both nations. Any change in this stability would only create challenges for
both U.S. and Chinese firms, as such protectionist legislation should be avoided above all

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other pursued trade policy.

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