The US-China trade imbalance : The role of trade, industrial and non-exchange rate policies

Abstract

The US and China are the two largest economies in the world and their bilateral trade has been evolving rapidly ever since China opened up its economy through trade liberalization. Over the years, China's trade surplus over the US has slowly been increasing and as of December 2010 it stood at a staggering 2781 billion USD. The trade between these two major powers has always been a study of interest for economists and several explanations have been given for the changing bilateral trade dynamics. But for many, the main issue in focus has been the apparent undervaluing of the Yuan against the US Dollar. They have blamed the Chinese Currency policy as the main reason behind the trade deficit and other economic woes of the US. Hence, the US has constantly pushed China to revise its currency policy and appreciate the Yuan (Renmimbi). However, there have also been studies which aim to disprove the theory that the revaluation of the currency would resolve the trade issues between the two countries. They delve into other factors such as China's restrictive trade policies, non-tariff barriers, unfair domestic protectionism for the state owned enterprises and the presence of US MNCs in China who make use of the cheap manufacturing and labour costs to quote a few. Even though, the deliberate undervaluationof the currency is not denied, it is unrealistic to assume that the exchange rate would appreciate to the kind of levels that the US is demanding of China and that by itself would solve the trade deficit issue that US is currently facing. Hence this study has been done to highlight the factors other than the exchange rate and their relative importance. We wish to bring out various features of the China-US trade such as the product profile in the trade basket, China's tariff and non-tariff barriers, export contributors of China, import content in Chinese exports, anti-dumping litigations made by the US on China and so an as part of the study. This mid-term report explains the study done till now, the inferences from the data that was analysed and the way forward for the remaining work.