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Essay: China and the USA’s economic performance & influence on other countries

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  • China and the USA’s economic performance & influence on other countries
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Analysis of the significance of China and the USA’s economic performance and the wider influence of these economies upon the UK, European and world economy.

Introduction

The United States and China are the two largest economies in the world. These two countries account 35% of world’s GDP. This conclusion is based on the GDP (Gross Domestic Product). It is the most commonly used measure of national economy. The GDP is the monetary and market value of all final goods and services produced in a country over a period of a time (Jeroen C.J.M. van den Bergh, 2009). The standard formula for the GPD is C+I+G+(X-M). The letters stand for Household spending, Capital investment spending, Government spending, Exports of Goods and Services and Imports of Goods and Services. Based on the above definition and formula, it can be concluded that GDP growth may be immoral because it does not reflect the consumption of resources and the impact on the environment. In addition, it cannot show the fairness of wealth distribution. However, GDP reflects the productivity of a country synthetically. It is easy to measure. The accuracy of the data is high, and it is comprehensive, practical and basic. In addition, the GDP is closely related to inflation, economic growth, and the unemployment rate. Therefore, comprehensively, GDP is the basis for measuring and comparing different economics. The United States and China have a decisive influence on world GDP, which is mainly reflected in the following three aspects: government policies, trading, and population status. This essay will focus on these three factors to discuss the chimerica’s economy and interaction of the US, China, UK, EU and world economies.

Basic situations of US and China’ GDP

There are basic situations and changes in the GDPs of China and the United States from 2008 to 2016. All related graphs can be found in the Appendix. The US’s GDP grew from 14.719 trillion to 18.624 trillion from 2008 to 2016. During this period, except for the decline of the GDP during the 2008-2009 financial crisis, the GPD rose every year. However, the GDP growth rate is not stable. In the composition of US GDP, the largest proportion is tertiary industry, with the largest share of the financial industry and the real estate industry. China’s GDP has been in a state of growth. Manufacturing contributes a lot to the GDP and the developed manufacturing industry increased its exports. These are mainly attributed to the cheap labour, however, the cheap labour reflects the large gap between the rich and poor, which cannot be derived from the GDP. In recent years, China’s GDP growth rate has declined and it decreased from 9.654% to 6.683% between 2008 and 2016 (World Bank). However, it still has the world’s largest growth rate. The rapid growth of the GDP ignores the consumption of resources and the environmental pollution caused by economic development. In addition, while China’s GDP is the second largest in the world, the per capita GDP is only about one-seventh that of the United States.

US’s policy and its impact on the economy

The US’s GDP has always being the best in the world. The data shows that from 1980 to 2015, the US accounted for an average of 27.68% of the world’s GDP (the Global economy.com,2016). The United States is one of the world’s largest trading nations, in 2017, the US was the world’s leading importer. After Trump took office, his economic nationalism has moved US trade away from globalization. way from globalisation. The United States recently launched an attack on the WTO and wants to circumvent the WTO dispute settlement mechanism. This is not the first time that Trump has demonstrated protectionism. US trade policy has changed significantly, affecting the US and other countries. There has been no major progress in the three countries’ negotiations on North American Free Trade Agreement (NAFTA). The main controversy is Mexico and Canada’s objections to the US’s proposal that NAFTA needs to include a sunset clause. They also object to the requirement for enjoying the tax free Free Trade Zone that more than 50% of car parts are produced in the US, and 85% are from the three countries. Trump even threatened to terminate NAFTA. The US’s objective is to reduce their trade deficit and the loss of manufacturing jobs. There are some possible risks. First, if the agreement is passed, the international competitiveness of the US auto industry will decline, and the cost of production will increase. Second, if NAFTA is terminated, then the production and employment of the three countries will be affected because their industrial chain is highly integrated after 23 years of deep cooperation. Trump has instigated multiple acts of trade protectionism. On January 23, 2017, Trump formally announced that the United States withdrew from Trans-Pacific Partnership (TPP). The purpose of the Obama administration’s implementation of the TPP was to weaken China’s trade advantage by establishing a regional free trade agreement that would allow the US unrestricted access to the Asia-Pacific market. In fact, while the TPP policy was conducive to consolidating the US’s position in the Asia-Pacific region, it would lead to the outflow of some industries and cause structural unemployment. Trump announced his withdrawal from the TPP as soon as he took office, and added tariffs. The main purpose of his trade policy is “America first” through the promotion of trade protectionism to protect the US labour market, reduce the trade deficit and revive the manufacturing industry. This will protect the development of local businesses and increase jobs. However, there are consequences for withdrawing from the TPP. Trade protectionism is contrary to the globalisation of free trade. If the US implements trade protectionism for a long time, its international influence will be weakened, especially its economic and political influence in the Asia Pacific region.

Trump’s immigration policy also showed an intransigent attitude. The United States is the largest immigrant country and its immigration policy has always been an important topic. Trump’s immigration policy maintains protectionism. The biggest concern is Trump’s establishment of a wall at the US-Mexico border to prevent the inflow of drugs and illegal immigrants. In addition, the requirements for immigration applications have been raised, and immigration quotas will be given to high skill and high salary people. These measures can reduce government spending on relief and reduce drugs and crime. However, it has seriously affected the relationship between the United States and Mexico.

The US’s $1.5 trillion tax reform policy has also received widespread attention. Corporate income tax fell from 35% to 15%, lower than the average level of OECD, and personal income tax also declined. The new tax reform policy will reduce the U.S. government’s income by 1.5 trillion US dollars. However, when companies return to the United States, the manufacturing industry will improve and create more jobs, which will increase domestic consumption. Capital began to flow back to the United States. The credibility of the government will be enhanced, the exchange rate of US dollar will increase, and the economy has improved. It is likely that the GDP growth rate will exceed 2.5%. The impact on other economies will be extensive, and many countries are starting to consider tax reductions. It has had a negative impact on developed economies in Europe, and the competitiveness of the European market has declined significantly.

China’s policies and influence

China is the world’s largest exporter due to its manufacturing industry. Manufacturing is the largest and most diversified industry in China. The output value of China’s manufacturing industry reached 25% of the global manufacturing output in 2014 and contributed to the world’s GDP. Figures for 2016 from CIA show that China exported 1.99 trillion dollars (cia.gov. 2018). As of the end of 2017, the PMI of China’s manufacturing was 51.6% (Stats.gov.cn,2017), although it was 0.2% lower than last month, it still reached the annual average level, and the manufacturing industry maintained steady growth. China’s large-scale foreign trade has, to a certain extent, improved the employment status and economic development of its trading partners. However, the low price of Chinese goods threatens the local products of the importing countries. For example, India has adopted trade protection measures to impose anti-dumping duties on 93 types of Chinese imports. In fact, the world has not stopped the anti-dumping cases against China. Due to anti-dumping problems, developed countries such as Europe and the United States do not recognise China’s market economy status and they believe that China did not fulfilled its commitments when it joined the WTO in 2001. Europe and America want to restrict the development of China’s trade.

Xi Jinping is regarded as China’s most powerful leader since Mao Zedong because the constitutional regulation regarding the reappointment of the country’s president for more than two terms was abolished. In addition, Xi Jinping’s ideas were written into the constitution. “the system itself is extremely unusual. China has two ladders of authority: the government and the party and the party hierarchy outranks the state one” (Anonymous, 2018). Most Chinese are against centralisation and regard it as regressive. However, it has positive elements. A centralised approach helps policy implementation and sustainability, which may have a positive impact on the economy. It is widely believed that this will add a lot of uncertainty to China’s political and economic future. “An important factor influencing corporate finance and economic growth in China lies in its government sponsored industrial policies”. (Chen et al. 2017). China’s 13th Five-Year Plan shows the economic policy and targets. The biggest concern is the reform of China’s economic structure. China is shifting from low-quality industries to high-quality manufacturing, eliminating outdated production facilities, and enhancing innovation and smart production to increase production technology and efficiency. This will further expand China’s manufacturing advantage and increase its international competitiveness. For the service industry, China further opened its financial markets to the world and promoted the establishment of a green financial system, which can attract foreign financial institutions to expand their business. Green financial services can provide products and services for overseas companies across borders. Consequently, the proportion of the service industry in the GDP will probably increase significantly. Furthermore, AIIB helps Chinese companies to release excess production capacity and increase industrial output. The most important thing about AIIB is to strengthen international trade and accelerate the internationalisation of the RMB. It is evident that China is evolving from the previous model of driving the GDP through obdurate exports and manufacturing, and has turned to stimulating domestic demand and developing the service industries, which will increase the proportion of consumption in the GDP. Due to this transformation, the growth of China’s GPD has slowed in recent years, however, if the transition is successful, then China’s competitiveness as the world’s second-largest economy will increase significantly.

The population status of China and the US

The current population of the United States is 325.7 million. Its population has the fastest growth rate of the developed countries. This is due to the fact that the United States has a good fertility rate and large numbers of immigrants. This keeps the United States’ production and consumption growing. In addition, the US population is highly educated. However, the rapid population growth does not solve the labour problem. The U.S. labour participation rate has dropped. This may be due to the fact that advanced technology in the United States has replaced a part of the labour.

China’s population is 1.379 billion people, which is approximately 18% of the world’s population, and four times the population of the US. The population has brought demographic dividends for China’s economic growth. The cheap labour force has promoted the rapid development of China’s manufacturing industry and increased the number of exports, contributing to the GDP. However, as China’s aging population increases, the demographic dividend gradually disappears. Therefore, China’s 13th Five-Year Plan promotes a comprehensive two-child policy and encourages the birth of a second child to avoid excessive population aging and the reduction of the labour force in the future. The huge population base means great potential of market.

The above analysis shows the US’s position as the world’s largest economy is stable. The US has strong political and economic influence. Trump’s policies show obvious protectionism and economic nationalism, especially in trade, which is contrary to globalisation and makes the US suffer from isolation pressure. As for China, its manufacturing industry has always maintained a leading position in the world. However, its economy is heavily reliant on exports and manufacturing. The overall industrial structure does not present long term advantage in the international competition. However, as China advances from low-end manufacturing to high-end manufacturing and supports the development of service industries, the competitiveness and advantages of China’s manufacturing industry will expand. If the transformation is successful, then China’s overall economic competitiveness will increase, and the increase in domestic consumer demand will mean market growth.

The interaction of the US, China and other economies

The EU is one of the most economically developed regions in the world. Economic integration has strengthened the EU’s economy. However, it has not completely recovered from the 2008 financial crisis. In addition, the sovereign debt crisis weakened the EU’s GDP growth. Furthermore, high unemployment and refugee problems have raised questions regarding the EU’s credibility. The people’s nationalist sentiment is rising. UK’s Brexit is the result of nationalism. In fact, nationalism is also spreading in other parts of the world. “The resurgence of economic nationalism threatens to derail seven decades of progress toward a more open global economy not only in EU.” (Alogoskoufis, 2017). The main victims of Trump’s trade barriers and steel tariffs are its allies. That made the EU uneasy and it stated that it would impose retaliatory tariffs on steel and motorcycle imports from the United States to rebalance bilateral trade. The value of the affected goods was 3.5 billion U.S. dollars. Trump’s withdrawal from the TPP, negotiating NAFTA and tax reform policies all show his protectionism, which will attract companies to return to the US and prevent too much investment in other economies, especially emerging economies. China is the EU’s largest trading partner. China’s huge market has enabled the EU to increase exports. China and the EU are in a mutually beneficial, win-win relationship in certain areas. The UK disregarded the US’s opposition and joined AIIB. After that, other EU member states joined AIIB, which has helped the internationalisation of the RMB. However, no permanent friends, only permanent interests. The EU does not recognise China’s market economy status and complains to the WTO about Chinese technology licensing rules in order to prevent the increase in China’s trade competitiveness.

Conclusion

This essay analysed the economic growth of the world’s largest economies, the US and China, from three perspectives; policies, trade, and population. Although China is the second largest economy in the world, its economic growth depends on manufacturing, exports and cheap labour. This is not a good economic structure in the long term. However, China is implementing structural reforms to ensure its competitiveness in the future. The GDP growth rate of US rose in recent years because of Trump’s tax reform policy, as it created capital backflow and increased employment and domestic consumption. However, the US is at risk of trade isolationism because it withdrew from the TPP and used hegemony in NAFTA negotiations, due to Trump’s economic nationalism and protectionism. The EU is one of the world’s most important economies, however, its economic growth is weak due to the financial crisis and the sovereign debt crisis. In addition, the rising nationalism in EU member states has had an impact on the EU’s system and development. The European Union remains one of the world’s most influential economies, however, the United States and China still have the most global influence.

5.12.2018

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