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The world is more connected than ever in the history. Thanks to the improvements of transportations by air and by sea, international trade of goods and services is significantly growing by the last two decades. New technology also provides more efficient communication channels, which closely integrated the world market as a whole. The world trade of merchandise and services are dramatically increased for the last ten years. According to World Trade Organization (WTO), the statistic shows that global trade of merchandise indices tripled in value and doubled in volume from 1998 to 2008 (WTO statistics, 2009). It is clear that most countries including developing countries and developed countries are enjoying the fast pace of growing cross-border trade.
Though few still oppose to the neoliberal globalization, most of the countries see the benefit of open market and promote the idea of globalization. How are Americans benefited from international trade? How did China experience a big leap in economic performance that largely driven by the export and import sector? In this essay, I will observe the benefit of international trade through the comparison of two world's largest export and import giants: the U.S. and China, with the focus on the labor market change, technological advances, and financial flows within and between these two countries. The rising trade volume impacted on the two countries significantly affecting their economy, but also challenges the traditional domestic market in the way never happened before: some are hard to cope with; however, most are positive effects that are welcomed by economists.
Part I: The overall view of U.S. and China on trading balance
The U.S. is China's biggest exporter over last decades. In the latest WTO statistic data, last year 2009, China export has a total of $1,428 billion, after the continuous growing total for ten years from $183 billion in 1998 (WTO statistics, 2009). The rate of increase is huge at an average of 23% every year. Nevertheless, the U.S. export, which is doubled volume, up from $680 billion in 1998 to $1,287 billion in 2008, and in the same time import doubled as well (WTO statistics, 2009). The trend of expending trade is a big focus at both countries. The fact of free trade is a key factor of a country's economic growth is well known globally and visible on the GDP numbers. The World Bank record shows the U.S. GDP average growth rate is steady at 3%, and the China has an impressive average growth rate of 9.5% for the year between 1998 and 2008 (World Bank, 2009). In a booming economic circumstance, no one will doubt the benefit of global trade to both sides.
However, at an economic downturn, just like the financial crisis in 2009, many will relate the domestic problems to liberalized trade. While China had been keeping up the pace of the development of the modern society, the U.S. had raised the debate over whether the liberalization of foreign trade is related to the bad performance of labor market in the U.S., remarkably noting the deficit of import and export: the U.S. had a high trade deficit of over $1,000 billion (World Bank, 2009). Conversely, while the U.S. consumers are enjoying cheap products from China, Chinese government are starting constraining policies to limit the foreign capital that flows in and out of the country.
These concerns should not be weighted over all the benefits that brought by the international trade. After all, a flourish global trading relationship is positive in several aspects. These aspects include restructuring and reform of labor market in both sides of trade; technology flowing in to third world countries and pushes of new innovations; and sparkle of financial flows at the global level.
Part II: Labor market reform
The fast growing international trade has an overall effect on the specialization for the labor market in a global sense. The trade effective market will transfer jobs from countries where labor cost is expensive to countries that cost efficient. But more importantly, cheap products are available for large numbers of middle income families, relatively increased the real income of purchasing countries. The benefit of the trade is a win-win situation from any perspective.
The U.S. in reform
The U.S. is largely in deficit in trading with partners around the world, which always been criticized for responsible of massive job losses in manufacture sectors. The opinion is so prejudice that the fact of creation of jobs in other sectors was ignored. While the U.S. buys products around the world, the export also increases significantly. Some estimate that the overall impact of the import export sector to economy is sum up to approximately zero (Douglas, 2002). The lost jobs are recovered in two ways: through the export oriented sectors such as farming and aircraft productions, because those are higher in export; other sectors that are funded by foreign investments. Douglas also criticize the Economic Policy Institute who put the number of lost job by the NAFTA is as high as 480,000 but without noting that the 170,000 jobs will be created by NAFTA (2002).
By tracking the unemployment rate of the U.S. from 1950, the numbers are very steady. As a matter of fact, the bureau of labor statistics, the unemployment rate from 1998 to 2008 is between 4.0% and 6.0%, with no sudden variation in the ten years (U.S. Bureau of Labor, 2010). It is puzzling to see the total unemployed rises from 67 million to 79 million but keep check back that the total number of individuals looking for jobs rise from 205 million to 233 million. A simple mathematic tells that the economy actually creates jobs absorbing more than half of the new individuals in labor market.
Said that total jobs are not lost, just been transferred to other sectors, the U.S. actually benefits from higher productivity by moving inefficient jobs overseas, mainly manufacture sectors. Also, the U.S. consumers can enjoy the cheap products from overseas, and the largest importer of the U.S. is China, which became the world factory after its economic reforms.
Labor market transform in China
China as one of the largest exporter in the world has the unbeatable advantage in resource and, most importantly, the labor advantage. After the 1978 reform, Chinese government had sent the clear message of resolving the labor market problem: the excessive labor in agriculture industry. While the export figure dramatically increased, the employment in export-oriented manufacturing sector is also surged.
An estimate of employment population is 423 million in 1980, and in 1990, the number climbed to 639 million (Gang, Perkins, & Sabin, 1999). Increasing in total employment individuals brings a lot tension in jobs, but also competitiveness. Many are involved in the export-oriented industries. At 1990, the number of workers in manufacture sectors is 105 million, and continues to rise to 130 million in 2002 (U.S. Bureau of Labor, 2010). It can be said that the export industry is a saver to the labor market in China. Before 2002, the unemployment rate in China was kept as low as 3% (State Council of China, 2004). This largely considered the benefit of increasing in export industry bringing up all other third industries including services in most cases.
The reform is not perfect as it would go; China had problems in its own. Income inequality and geographical distribution inequality is a large concern. Migration of workers is another worry. China is a very large country, in terms of geography and population. Also it is a developing country, the benefit of trading international surely helps the development of economy, but the problems are not solved overnight. As China reforms again, the labor market emphasize is again a workable topic in reflecting the status of export giant.
To the more efficient labor market
To maintain competitive on the global market, labor market efficiency is a key factor for the trade to happen. The U.S. had transferred jobs to other sectors which are more efficient, could achieve its productivity in exporting goods and services. China, on the other hand, can the comparative advantage last long enough? To answer, the globalization will show the way to a more specialized labor market over the world, only competitive market survives.
Part III: Technology in Trade
Technology is an essential part of our life now. It is the same to international trade. Technology is spread fast when it is traded. It is also a special case when implementation is the core of trade not necessarily visible merchandise. Technology not only welcomed by developing countries as a tool to improve the productivity, also are the most profitable products for selling companies. The U.S. is advanced in technology, but China is catching up with the term.
U.S. leading technology
The U.S. is well known for its technology development. Some big notions are all from the U.S.. Microsoft Corporation, Apple Corporation, and so on, many companies are globally sound. These companies sold billions of products over the world, covering every corner of the world. The technology trade is now considered significant part of international trade. The World Bank data shows that the U.S. high technology trading consists around 30% of the manufacture exports (2009). That is from 1998 to 2008, high technology had always been the main manufacture exports, a one third of the total portion. The technology is a fast increasing market for the U.S.. In one year time of 2008, the electronic export has been doubled from 2007's $52 to $121 billion (WTO statistics, 2009). This trend for the U.S. is showing a strong position in an outflow of technology from the U.S..
The expectancy of a prospering market for high-technology is necessary for the growth in trading of advanced products. Take the computer market as an example, the growth of the market in Asia/Pacific region has been high as 24% for the last decades, and is continuously to be expected a similar high growth rate as the past (IDC, 2010). The rising market of new technology also provided the opportunity for the U.S. computer makers full fill the market as they are the leading technology providers. Microsoft, the software provider, and Intel, the hardware provider, have been holding the 80% to 90% of the world market share (Krazit, 2007). International trade of high-technology products brought efficient products and services available around the world, provided the by the leading companies in the U.S..
The U.S. is always advance in researches and developments, which are keys to improving technologies. Trade of technology is always been the advantage of the U.S. in performing actively in the global market.
China's technology revolve
China is significant dependent on the export industries. But export sector is not perfect. Competition is a serious threat to factories and industries. China is always trying to attract foreign investment and more often, technology as assets in corporation with multinational corporations.
A typical revolve in production technology comes from corporation with large company from across the border. These companies sets up factories in desired countries where most cost efficient. Obviously, China is one of the optimal places for them with ease of regulations and low labor cost. In order to be capable of producing homogenized products, the factory adopt a lot of standards accordingly to developed countries (Spar & Yoffie, 1999). These standards include industry standard, such as ISO9000; some technical and environmental standards, such as free of lead in production. Those standards provided new technology that required achieving the goal of production.
Aside of the technology advance in production processes, China also attract lots of new technology companies to set up production bases in China. Samsung and Sony are leading electronics company, and both of them have set up factories in China. Productions of LCD screens, cell phones, and so on are sold all around the world. Data shows that the export of high-technology from China has risen. The percentage of high-technology export from China is doubled from 15% in 1998 to 30% in 2007 (World Bank, 2009). The numbers is very close to the U.S. percentile. China is catching up with the numbers to comparable level to the U.S..
The increasing technology change in China is brought by the international trade, more specifically, is forced by a global desire for quality products. The continuous demand for high-technology will put China in the frontier for producing high-technology. And meanwhile, China could also improve the technology in production with accordance to more and more specified global standards.
An outlook for the future
Technology has changed ways of living and working, and the same to international trade. We will anticipate more high-technology trade across borders, accompanying ideas flowing around the world. It not only increases our living standards, exchanging technology also put every one of us in the accessible world of future.
Part IV: Financial freedom of the global market
Speaking of international trade, financial market is also part of it. While goods and services are flowing at a low cost of transportation, foreign capital merely cost nothing to flow in a global sense. After every transaction, how companies pay the balance of trade? This is the fundamental use of a foreign capital: pay the exporter with a certain currency. Most global trades are based on U.S. dollars. This raises another question, what to do with the dollars of a country with big trade surplus, like China?
U.S.'s role in financial market
U.S. is a leading market for capital investment. The U.S. stock market is perceived as stable and profitable, as well as the U.S. Treasury and security bonds. The U.S. market is a safe place to invest in. As the World Bank records, the U.S. had increasing foreign direct investment of $30 billion in 2000. But after the 9/11 terrorist attack in 2001, the number is dramatically dropping in following years to only $6 billion. The number again recovers before 2008 (World Bank, 2009). U.S. Treasury holds by various countries. Japan, China, and the U.K. are the top 3 of holders of U.S. Treasury securities. While Japan holds almost 40%, China and the U.K. hold approximately 10% each (Terada, 2008).
As mentioned in the early chapters, the U.S. has a large deficit of trading with other countries. The performance of the U.S. stock market draws a lot attention of funds over the global. For example, China is experiencing the surplus from the trade. That is, China holds a lot of U.S. dollars after export largely exceeded import. The 2008 import and export data of China reveals a nearly $300 billion surplus (WTO statistics, 2009).
In perusing a high profit, excessive dollars around the world is continuously flowing into the U.S., investing in U.S. companies and businesses. The U.S. financial market is open, and closely monitored by the regulations. It has a history of over hundred years, with specified regulations on the market, which developed to be a successful capital market.
China rising, investing in China?
China, on the other hand, is a relatively new economic identity. But the country has a lot of energy. The growth rate is 9.5% for the year between 1998 and 2008 (World Bank, 2009). The Chinese government is calling for foreign direct investment accompanying many attractive policies. The attraction to invest in China is huge. A survey points out that there are more than 250 foreign banks and 140 foreign nonbank financial institutions (including insurance companies) have opened their own representative office and branches in China. Many of those are invested in the two stock markets in China: Shanghai and Shenzhen (Gang, Perkins, & Sabin, 1997).
The recitation of the problems the Chinese financial market facing could lead one to conclude that China would someday suffer the same financial crisis when the 1997 Asia financial crisis hit the market. Surely China has no stronger market than the Indonesia, Republic of Korea, or Thailand, but the government's controlling over the financial flow at the border is quit a saver.
For the new financial market of China, government regulations and policies are still necessary. Investing in China, especially in a long term, is still attractive to investors around the world.
Asia financial crisis in 1997
Many will blame foreign assets for the crisis happened in Asia in 1997. In short, the crisis started because South East Asia countries are short of foreign reserve, causing their own currency value to depreciate dramatically. The crisis hits hard on currency exchange and stock market, leaving Thailand, Indonesia, and some countries in a highly inflated market. The International Monetary Foundation (IMF) was involved to aid these countries with numerous packages, stabilize the exchange rate and the stock market.
The crisis significantly increased the cost of goods in the manufacturing sector of those Asia countries. They lost the competitive advantage relatively to others. Comparing to China, these countries hold a lot of short term debts, while China is holding mostly long term debts (Gang, Perkins, & Sabin, 1999). And moreover, China has a lot more foreign reserves after the trading surplus.
China had been hurt less than other countries mainly because the strict control of financial capital flow. At the time, China makes sure that most of the investment goes to manufacture sectors that are secure in the long run, and limit the amount of capital directly moving to the capital market such as stock, which produce high risk in the short run. To trade dominated countries in Asia, probably still have lessons to learn.
Although risk is observed, the connection of financial market in the global is tighter more than ever. Liberalizing trade also complement with liberalizing financial market. But as long as policies are leading the right direction, such free and prosper capital market over the global is foreseen.
Foreign exchange rate
As we know that trade deficit and surplus have left countries with currencies that need to be exchanged in the global market, the foreign exchange rate is there for important to determine the real economy of a country, specially country with large volume of import and export.
The U.S. has been criticizing the China's foreign exchange policy of responsible for the Americans losing jobs due to the manufacture industry shift to overseas, and China is the main importer of the U.S.. Challenge is raised not only by China's low labor costs but also by the skill upgrading of China's exports. Foreign exchange rate is only one of many means to criticize the deficit U.S. is experiencing with China.
China has the responsibility to adjust their currency values, but this cannot be done overnight. Under current trading benefits to China, it will not give up of the advantage in exchange rates against other import countries. International trade helps China in the way that favorite a cheap value of its currency. But the domestic market will evolve after many years of fast pace in development; the pressure will eventually put on the exchange rate.
The U.S. also tried to devalue the dollar in favor of their export industry. But when come to payment of international balances, a high value is in favor. At the end, the exchange rate is controversial in the business of international trade.
Part V: Conclusion
International trade brings benefit greater than back lash it could bring. A better reformed global labor market is a positive shift of duties in productions of goods and services. Technology change along with trading could upgrade the platform of a modern society, raising the standard of living, and enjoy the low cost by high-technology goods. By utilizing the surplus and foreign assets, capital assets could settle in a connected market, through a more efficient and plausible global market. Strengthening trade would therefore link the work much more interactively.