To: Jeffrey Moon, Assistant United States Trade Representative for China Affairs
From: xxx
Date: September 18, 2016
Re: The U.S.-China Trade Relationship: Briefing the Next Administration’s Trade Reps.
The annually increasing trade in goods deficit between the United States and China has become a central issue this election cycle, with heated debate as to how the next administration should shape the future of the most important economic relationship in the world. It is essential that the next administration make policy decisions reflecting the complex nature of international trade in the 21st Century as well as avoid simplistic characterizations of China’s policies and their implications.
The United States trade in goods deficit with China reached an unprecedented $367 billion in 2015 (U.S. Census). In simple terms, this indicates that the United States imports $483 billion and exports only $116 billion to the Chinese Market (U.S. Census). However, when incorporating the fact that “quite often goods and services move across multiple national borders in order produce a final product that is then exported,” (Derviş, 2013) sources indicate that the deficit decreases by around 25% (Derviş). This “suggests that while China is exporting less domestic value to the U.S., it is adding more value to its exports to other countries” (Derviş).
The growing reliance of U.S. consumers on Chinese manufacturing has had major impacts on the U.S. manufacturing sector. One analysis of U.S. local labor markets found “that that exposure to Chinese import competition affects local labor markets not just through manufacturing employment,” but also through “reductions in both employment and wage levels (that) lead to a steep drop in the average earnings of households” (Autor 40, 2012).
The Chinese yuan has appreciated by approximately 35% relative to the U.S. dollar since 2005, which is still 15% less than the yuan’s value relative to all trade partners (Klein, 2015). China is often characterized as a currency manipulator, because since 2005 they have pegged the value of the yuan “to a basket of currencies, which among others includes the dollar, the Euro, the Japanese yen, and the Korean won” (Salitan, 2010). This leads many to characterize the currency as “still more undervalued than it otherwise would be under a pure flexible exchange rate regime” (Salitan). However, as many countries use some type of fixed exchange rate for their currencies, “the question is whether a country has kept its currency artificially cheap to boost exports” (Klein).
Lax Chinese labor and environmental standards also remain a major concern to U.S. policymakers. China updated its main Environmental Protection Law in 2015 (Zhang, 2014), but remains “the world’s largest source of carbon emissions” (Albert, 2016) alongside a plethora of internal environmental issues. China’s average hourly compensation cost for manufacturing employees was $1.75 in 2010, which allows Chinese firms access to far cheaper labor than U.S. firms, who paid $34.75 the same year (The Conference Board, 2014). Since joining the World Trade Organization, as of 2003 “China (had) cleared 2300 laws, abolished 830, and modified 325 at the national level so far” (Guo 7, 2003), but major concerns remain that “the lack of enforcement have compromised China labor rights” (Guo 7).
While the Obama Administration has aggressively pursued the expansion of international trade, the next administration may not be inclined to pursue the same pro-trade agenda. Secretary Clinton has been pro-international trade in the past, but recently has flipped to a more anti-trade agenda. Donald Trump is more critical of the United States’ relationship with China, and hopes to go as far as “immediately declaring it a currency manipulator,” “forcing China to uphold intellectual property laws” and “putting an end to China’s illegal export subsidies and lax labor and environmental standards” (Donald J. Trump for President). The challenge will be to shape the narrative by sharing factual information with the next administration about the U.S.-China trade relationship, in order to best hedge against major future mismanagement of the relationship.