For the last twenty eight years, China has been quickly growing into one of the largest economies in the world. China has accomplished this feat, in part, by radically changing their policies on trade and free market interactions with other countries. During this process, China has bought approximately one hundred trillion dollars of United States debt in the form of Treasury bills, notes, bonds, and Inflation Protected Securities (Amadeo). This debt has given China leverage against the United States which has enabled China to keep the value of the United States dollar high, while keeping the value of the Chinese yuan low.
As the inflation of the dollar continues to negatively affect the United States economy, China has become an economic superpower. Recently, concern has risen that China is a threat to the economy of the United States. China has become a perceived threat to the United States economy because of the increasing trade deficit between the two countries, the ability to undercut production costs of similar products produced in the United States, and the amount of leverage that China has over the United States due to the amount of money that has been lent by the Communist nation.
Trade deficits between countries are caused when a country imports more goods from one country than they export to that same country. In the case of the United States and China, there is approximately a two hundred and twenty five billion dollar trade deficit (Prassad). The United States imports nearly three hundred and thirty five billion dollars worth of goods and services from China, while exporting only a little more than eighty billion dollars worth of goods and services to the growing economic power (CRS).
The disparity in trade between the two countries results in a flooding of Chinese made products that force their United States competitors to lower production costs. In many cases, lowering production cost of domestic products results in either the closing of these businesses or the outsourcing of jobs. Both of these cause the loss of jobs in the United States. One of the reasons that the United States has been unable to lessen the trade deficit is China’s ability to undercut production costs of similar products made in the United States (Elwell 27) China’s overall cost of living is much lower than their United States counterparts (Amadeo).
Therefore, they are able to produce goods and hire labor at a much lower price. One of the main reasons for this economic statistic is China’s population. It is nearly three times that of the United States, giving China a much larger work force to produce electronics, automobiles, and clothing at a fraction of the United States production cost (CIA). Not only does this negatively affect employment in the United States, but it also impacts their ability to compete on the global market.
Industries that involve manufacturing, such as automobiles, computers, and electronics have decreased by thirty four percent since 1998 (Prasad). This has a negative effect on the amount of goods that the United States can export. Finally, China has gained a certain amount of leverage affecting the United States economic policies, due in part, to the amount of money that China has loaned the United States. Starting in the early 1980’s, every time the value of the dollar would drop, China would buy Treasury bills, notes, bonds, and Inflation Protected Securities to keep the dollar stable in value (Elwell 36).
After nearly thirty years of this practice, the United States has come to depend on Chinese loans to maintain its currency value and China has come to own a majority of United States debt. This imbalance of debt has created a number of different scenarios that could bring about potential political and economic problems for the United States. China could theoretically cash in their treasuries and bonds tomorrow, which would cause the United States dollar to suffer massive inflation. While this scenario is not necessarily in China’s best interest right now, the possibility should concern the United States government.
Instead, China could use their debt leverage to impact foreign trade policies and more importantly domestic political policies that budget how the United States spends its tax dollars (Elwell 22). China has become a perceived threat to the U. S. economy because of the increasing trade deficit between the two countries, their ability to undercut production costs of similar products produced in the United States, and the amount of leverage that China has over the United States due to amount of money that has been lent by China.
Although the United States has taken steps to close the trade deficit, such as convincing China to raise prices on their exports, there is still a considerable gap (Prasad). The United States government continues to print money that they simply can’t afford, therefore, relying even more heavily on China sustaining the value of their currency. Unless the United States is able to close the trade deficit and regain control of our economic flexibility, the problems caused by foreign countries owning our debt will remain eminent.
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