The US-Chinese Economic Relationship and Re-Shoring

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Table of Contents

Introduction
Comparative Advantage
Factors Contributing to Re-shoring
Benefits of Re-Shoring
Rationale
Bonus Question
References

Introduction

Over the past decade, China has become an economic powerhouse. This is greatly attributable to the low cost of labor readily available from the high population. The low cost of labor greatly encourages investors to set up their operations in China in order to gain a competitive edge over their rivals. On the other hand, the movement of companies abroad has adversely affected workers in the U.S, leading to great levels of unemployment.

Comparative Advantage

It is the theory that there exists a mutual benefit between the two countries when they carry out trade with each other when the relative cost of carrying out the business is different in the two countries. In this case, none of the two countries has an absolute advantage over the other. By trading with America, China stands to gain through the creation of employment for its vast population as companies from America and other parts of the world move their operations into the country.

America, on the other hand, stands to gain from low costs of manufacturing/production through the utilization of the cheap labor available in China. Although China has the upper hand when it comes to the production of goods, both countries experience mutual benefit from the activity of trading with each other (Marsh, 2011).

Over the past decade, China saw an increase in the number of foreign companies investing/ setting up their plants in the country. For this reason, China has been able to displace America as the leading manufacturer in the world. All this it owes to its vast population of about 1.6 billion citizens. The high population has increased the demand for jobs, which are in very low supply. In return, the high demand for jobs has seen a decrease in the prices of labor in the country.

The low costs of labor consequently reduced the general cost of production. Therefore, it acts as an attraction to foreign investors who rush and build up plants in China. America was among the worst hit by the effects of this mad rush as tens of millions of Americans lost their jobs. China, therefore, had a great advantage over America in producing cheap labor, as is explained in the Theory of Absolute Advantage.

As Mr. Shami found out, producing goods in America has its own incentives. This includes a sense of ownership among the consumers, better quality at home, efficiency, and better technology that is readily available at home. In addition, the rising costs of labor in China are pushing up the general costs of production, which, in return, is improving U.S competitiveness. The Mercantilists Theory explains the re-shoring trend in America (March 2011).

Factors Contributing to Re-shoring

As demand for the Chinese cheap labor increases, the price of the labor increases too. This, in return, forces the foreign companies in China to reconsider the costs involved in the production of their products in their mother countries as compared to those incurred in producing the goods in China. If the comparison favors their mother countries, they start packing their bags and head back home. Secondly, there is an assurance of the quality of goods manufactured, as there is superior technology locally. In addition, local labor is highly trained and skilled in producing goods of superior quality. Thirdly, the tag ‘Made in America’ creates a sense of ownership among the consumer. This creates brand loyalty and, in return, an assured market.

Benefits of Re-Shoring

Re-Shoring will reduce the country’s merchandise trade deficit by around $100 billion in a decade. This reduction will automatically reduce the huge debt that the U.S has with China. It will also greatly enhance America’s competitiveness and may actually see it return to its former glory of being the world’s leading manufacturer. In addition, re-shoring will encourage investors to invest back home. Consequently, this will prevent capital flight and increase jobs in the local market by around 3 million jobs in the decade. In the end, this will benefit the individual American and, eventually, the economy as a whole.

Moreover, in-house production will enable American companies to compete on quality and, at the same time, enjoy the benefits of operating in an environment enabled by superior technology. They will also be able to minimize their production costs because the local labor is well trained and thus efficient (Financial Times Express, 2011).

The U.S could adopt regulatory measures to ensure that the cost of labor is on the lower side like the Chinese government. In fact, Congress could pass the president’s plan for strengthening local manufacturing. With such tools, the U.S could once again regain its stature as a manufacturing powerhouse. In the end, the economically burgeoning power of China will dwindle, and the perceived trade deficit reduces dramatically to the United States’ favor (Financial Times Express, 2011).

Rationale

China’s Benefits From Off Shoring

Firstly, offshoring creates a huge number of jobs needed by the Chinese. It opens China to reveal the rich and diverse talents hidden in China. Secondly, offshoring has forced China to invest heavily in infrastructure to be able to accommodate the amount of business transacted in the country. This, in return, enables China to develop its hotels, airports, and even its train services. China currently boasts of having the world’s fastest train. Lastly, offshoring greatly contributes to the tremendous growth in the Chinese economy. As of last 2010, it was among the world’s fastest-growing economies. The US was not anywhere near its economy, almost falling apart after the banking and credit crisis of 2008.

The Chinese government could enact regulations to restrict the hiking of labor costs to ensure that re-shoring does not take place. This will ensure that labor costs are on the low side constantly. This will ensure there is a constant stream of foreign investors. Secondly, it could also seek to minimize the other costs involved in the manufacturing of goods such as the cost of electricity to keep the cost of production in China at an even lower level. Lastly, the government of China could also adopt measures to reduce the number of requirements for entry into the Chinese market. This will definitely attract new investors to enter the market (Financial Times Express, 2011).

Reasons Why Canadian and Mexican Companies Will Benefit From the U.S Re-Shoring

All the companies in the three countries operate under almost similar regulations as they are in the same region. The demand for goods and services affects this market in almost the same way. Therefore, the return of American companies back to America may increase the supply of goods and raw materials and also remove the focus from the Chinese based products to locally (regionally) produced products. Re-shoring may also prevent labor flight to other parts of the world by providing jobs in the region. Hence, there is an almost palpable regional need for American firms to head back home. The clarion call stems from the benefits outlined above as governments grapple with the worst economic downturn in a century (Financial Times Express, 2011).

Principles of WTO

The Principle of Non-Discrimination

It requires a WTO member to apply similar trade conditions while transacting with all WTO members. It simply implies that WTO members should treat others in a favorable manner. In addition, a favor extended to one member of the WTO in a certain transaction similar treatment should happen to any other WTO member in case of a similar transaction.

Reciprocity

This principle advocates for Nations to do mutual things for each other. For example, the reduction of transaction tariffs should be mutual and equal in measure. Markets should be freer on both sides of the spectrum. Barriers restricting such trade should effectively come down to enable more trading for mutual growth and benefits (Hill, 2004).

Predictability

World Trade Organization proposes that any agreements arrived at should be binding and long-term. Any member should not decide arbitrarily to change any terms or conditions. This gives confidence to members, investors, governments, and any other stakeholders. It is a good ingredient for promoting healthier relations and growing economies. The subjects that touch on this principle include market-opening commitments, tariff rates, and trade barriers (Hill, 2004).

Beneficial To Less Developed Countries

This is a critical principle. However, in recent times and in the past many developed countries have misused this principle. It proposes that underdeveloped countries should enjoy special privileges when dealing with economically strong economies. This will enable them to enjoy greater visibility and flexibility in the marketplace. At the start of the supposed agreement, it helps these economies to adjust to the current economic environment. Adjustments include the sensitization of its citizens and structural changes, which may be much easier for the big economies.

Competitive and Fair

The WTO strongly advises that a fair and level playing field should exist for all nations. Every country should fairly compete, and universal human standards upheld. It discourages unorthodox practices such as arbitrary dumping of obsolete products to third world countries. This practice common among the developed countries is inhumane and self-seeking. It also goes against the United Nations Charter. Others include unfair export subsidies and cheap product development to gain market share (Marsh, 2011).

Bonus Question

Economic Integration of EU: Characteristics and Limitations

The EU conforms strictly to the principles of the WTO. The integration started at a time when the world grappled with much unrest. Cold war and invasions were rampant. However, as time went on, more deliberations continued. Later, after more than four decades of careful deliberation, the countries reached an agreement. Each country maintains its sovereignty. Any country can initiate policies to defend its territory.

It can also start a war with any country. Economically, the bloc has a common currency. Though citizens have individual citizenship, they can move from one country to another with minimal restrictions. A person can also invest in any country. However, some countries still require collaborating with members of their country to allow a certain level of investment (Hill, 2004).

References

Financial Times Express. (2011). Higher Labour Costs In China Begin to Push Manufacturing Jobs Back To US, Study Finds. Web.

Hill, C.W. (2004). International Business Competing In the Global Marketplace. New York: Prentice Hall.

Marsh, P. (2011). Products Proud To Be ‘Made In America’. Web.

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