South-Westerns' Economic News Summaries
U.S. Trade Deficit with China Continues to Grow
Topic International Trade
Key Words

Trade Deficit

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Reference ID: A138839553
News Story

For every $1 worth of goods that the U.S. manufacturers and ships to China, the U.S. buys $6 worth of Chinese goods. U.S. imports from China currently grow at nearly 30 percent a year. At this rate, Americans will have to triple their exports to China just to keep the trade gap from widening further.

So many of America’s brand names are actually manufactured in China that we cannot easily answer the question of what a “Made in U.S.A.” label really has to offer? From clothing to cars, Chinese consumers need look no further than their own domestic factories to find the goods they want or need at affordable prices.

Unless the U.S. can somehow reverse this trend, the future trade deficit with China will certainly widen even further. “The only U.S.-produced items that I can think of that exist in large quantities in China are dollar bills,” said Matthew Crabbe, Managing Director of Access Asia Ltd., a market research firm.

Chinese officials attempt to deflect criticism of their role in the growing deficit by pointing out America’s willingness to borrow from the rest of the world. Borrowing allows the U.S. to consume at a higher level than would be possible based on their own economic production. “Even if the United States stopped importing from China, it would have to buy from somewhere else,” said Liao Xiaoqi, China’s Vice Minister of Commerce.

Changing trade patterns in Asia also contribute to the trade deficit. Companies from Japan, South Korea, Taiwan and other Asian countries increasingly manufacture only the most technologically sophisticated components of their products in the domestic market. Asian firms then ship these components to China, where the less complicated parts are purchased and the entire product is assembled. These Asian countries—part of the so-called Asian Tigers of the 1990s—operate thus on what economists refer to as comparative advantage. They tap individual countries for the parts those areas can produce most efficiently and then ship the finished product to Europe and the United States.

America’s export account with China will not likely improve in the near future—partly because of U.S. firms’ own marketing campaigns. “American brands are not actively attacking the Chinese market—lazy, maybe,” said garment industry magnate Andrew Leung, who also chairs the Hong Kong Textile Council. “You see all the Italian brands doing quite well.” If these trends continue, the trade deficit will almost assuredly continue its rapid growth.

Questions
1.

Discuss the meaning of comparative advantage, citing an example in a two-good economy.

2. Define a trade deficit and compare it to a budget deficit.
Source Keith Bradsher, “Made in U.S., Shunned in China”, The New York Times Online, November 18, 2005.
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