Transcript indigenous innovation capability

U.S. and Chinese
Balance of Trade
Robinson Reford
Current Situation
•2014: $342.6B deficit
• $124B exports: 3rd largest partner
• $466.6B imports
• Growth expected
Going to China…
• Grain
• Aerospace products
• Cars
• Electric components
• Medical instruments
• Chemicals
• Machinery
• Meat
Coming from China…
• Computers
• Communication equipment
• Manufactured goods
• Clothes
• Shoes
• Electronics
• Furniture and appliances
Why?
• Cheap goods
• Made possible by:
• Lower standard of living
• Economies of experience
• Systematic currency pegging at levels lower
than the USD
What is happening?
• China’s trade surplus is being accumulated
in USD
• In turn used to purchase US treasury
securities
• Keeps the USD stable and interest rates
low
What is happening?
• Gold-Standard System no longer in use
• US can print money if need be
• Current system benefitting both countries
Question
• Is this trade deficit sustainable?
• How will it end?
Hypothesis
• No, this trade deficit is not sustainable,
due to the changing Chinese, American,
and global economies
• The end will depend on the collective
approach taken by the Chinese and
American governments
First Opium War 1839-1842
• High demand for Chinese goods in Europe
• Tea, silk, and porcelain
• No demand for European goods in China
• Self-sufficient trade network
• China only accepted silver as payment
First Opium War 1839-1842
• Much higher demand for Chinese goods
resulted in massive trade deficit
• Solution: Sell opium, an addictive
substance, to China through India
• Eventually China banned the trade of
opium
First Opium War 1839-1842
• Following disagreements and violations of
treaties, a war began between the British
and Chinese
• Eventually led to the Second Opium War
fought on similar grounds
Parallels
• U.K. and U.S. being the world’s leading
economic power
• Lack of demand for Western goods
• Difference is U.S. can print money,
whereas U.K. had limited silver
Solution
• Ended in war
• What will happen between the U.S. and
China?
Current Situation
• Unlike the Opium Wars, money is flowing
back to the U.S.
• China buying U.S. treasury securities
• FDI
• Other investments
U.S. Treasury Securities
• Makes up the bulk of what they do with
their USD
• Largest foreign holder of U.S. securities
• Done to prevent CNY appreciation against
USD (through inflation)
Issues
• Giant holding of U.S. debt could give China
power over the U.S.
• However, it appears to be a mutually
beneficial arrangement
• Chinese dependency on strong U.S. economy
• Do not want to trigger inflation
• Must continue purchasing in order to maintain
favourable CNY to USD rate
U.S. Secretary of Defense
• U.S. Secretary of Defense conducted a
national security risk assessment of U.S.
federal debt held by China
• “Attempting to use U.S. Treasury securities
as a coercive tool would have limited
effect and likely would do more harm to
China than to the United States.”
Foreign Direct Investment
Other Investments
• Equities ( >10% stakes however )
• Real Estate
• Largest foreign buyers of U.S. real estate
over the past 2 years
• 24% of total U.S. international real estate
sales
Impact of these Investments
• Do they create American jobs?
• Do they simply favour Chinese firms?
• Intellectual property concerns
To summarize…
• Unlike during the Opium Wars, money is
flowing back to the U.S.
• However, it is China’s decision to do so
• There exists a lot of debate and tension
Current Situation
• If this continues, there will be no issues:
• U.S. will continue to get cheap goods
• USD won’t inflate
• China will have a guaranteed trade partner
Issue
• China is showing trends moving away from
being a low-cost producer
• What makes current relations favourable
to U.S. is low-cost goods, made possible by
low standard of living in China
Chinese Development Trends
• As China transitions from developing to
developed, standard of living and wages
will increase
Disposable Income
Chinese Development Trends
• Modernization of their economy from lowtech manufacturing
• “National Medium and Long-Term
Program for Science and Technology
Development (2006-2020)”
• Policies since 2006 reflect this transition
Chinese Development Trends
• Emphasis on indigenous innovation
• Reliance on foreign technology to decline
from 50% to 30%
• “China must place the strengthening of
indigenous innovation capability at the
core of economic restructuring…”
Current Situation
• What makes it work is China’s reliance on
the U.S. as a partner
• Mass consumption
• High tech exports
• This is why China’s holding of U.S.
securities is not seen as a threat
Outlook
• With the direction in which China is going
with their economic development and
policies, could we see them become “selfsufficient” as they were prior to the Opium
Wars?
What is being done?
• The U.S. recognizes the threat if the
current system were not to persist
• As such, they are encouraging China to
take a number of steps towards solving
“long-term strategic challenges”
Chinese Pledges
• Pursue economic efficiency rather than
protectionism
• Market-determined exchange rate
• Liberalize FDI restrictions
• Strengthen intellectual property laws
Outlook
• 2011: Commitment to “positive,
cooperative, and comprehensive U.S.China relationship.”
• “The U.S. reiterated that it welcomes a
strong, prosperous, and successful China
that plays a greater role in world affairs.”
Outlook
• “China welcomes the U.S. as an AsiaPacific nation that contributes to peace,
stability, and prosperity in the region.”
• Despite this, there seems to be a contest
for supremacy between the two nations
Outlook
• There is the view that China’s long-term
objective is to displace the U.S. as the
world’s largest power
• China has of course denied this suspicion
• Military spending and research is
increasing
Outlook
• U.S. predisposition against non-democracy
• Some Chinese say that the U.S. has
political objectives that will prevent them
from pursuing cooperation
Solution
• To avoid war, as was the case in the 19th
century, a cooperative approach needs to
be taken
• If not, threats of another Cold War
scenario could come true
Solution
• The economic solution that would most
benefit the U.S. would be to search for
new trade partners and have China take
steps towards a market economy
(currency, FDI restrictions)