CHINA

China current value and US trade deficits

China current value and US trade deficits

In 2000, the total value of goods and services exchanged between countries as a result of international trade was roughly $6.9 trillion. Approximately 80% of this trade involved the exchange of goods, with services accounting for the remaining 20%. Nearly half of merchandise (goods) trade involves office and telecommunications equipment, automotive products, chemicals, food, and fuels. A relatively small number of countries account for the majority of international trade. Indeed, 10 countries—including the United States, Japan, and Western Europe—account for nearly 60% of trade in goods. Most international trade takes place between countries whose economies are highly developed. The United States is the world leader in merchandise trade, accounting for 12% of exports and 18% of imports. The same countries that dominate merchandise trade also dominate international trade in services, with the United States again being the lead exporter and importer.

When a country engages in international trade, it prefers that its exports exceed its imports. When this occurs, international trade generates income for a country. For many countries, however, the value of their imports exceeds the value of their exports. These countries experience what is termed a trade deficit. For example, the 2005 trade deficit of the United States (the excess of imports over exports) exceeded $700 billion. The United States has trade deficits with every one of its major trading partners. During recent years, the size of the U.S. trade deficit with China has grown significantly as the result of China's growing importance as a manufacturing location. China's large population provides it with the world's largest labor force. Chinese manufacturing wages are approximately 2% of what they are in the United States. Today, Americans and Europeans purchase a wide range of products (everything from toys to television sets) that are manufactured in China. Increasing imports into a country are an indication that consumers prefer to purchase goods and services produced in other countries rather than goods and services produced in their own country. This generally occurs when goods and services produced in other countries are cheaper and/or of better quality than domestically produced goods and services. This, however, has serious implications for the economy of the importing country. Falling sales for domestic businesses can result in the need to lay off workers, resulting in higher unemployment levels. When a company (or sometimes a whole industry) sees that its sales are being negatively affected by imports, it often turns to its government for assistance.

Free Trade And Barriers To Trade

Free trade is the idea that goods and services should be traded between countries without any interference from the governments of those countries. Truly free trade, however, rarely exists. The governments of countries erect both tariffs and quotas that affect the free flow of goods and services between countries. A tariff is a tax that must be paid when a particular good or service is imported into a country. A quota is a numerical limitation placed on the volume ...