Market economy is characterized by free movement of goods and services. The market involves price determination by laws of supply and demand without interference from the government. In contrast, a socialist market does not allow the market to dictate prices.
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Prices in a socialist market are set by external forces, such as government. For example, through monopolization of factors of production by the Chinese government, the prices of commodities are centrally determined.
The current essay is an attempt to look at the relationships between the US and China regarding their trade and Foreign Direct Investment (FDI). The essay will also contrast their types of markets and look at quality control issues China is facing in exporting commodities to the US.
Trade Relationship Between US and China
The United States has a low saving rate that has resulted in frequent deficits in federal budgets and shortage of domestic investment funds. To bridge these gaps, the United States has to borrow from countries with high saving rates such as China.
In 2009, the International Monetary Fund (IMF) ranked US as the global leader in foreign capital importation with a global total of 38.2 percent. China was also ranked first among foreign capital exporters with a global total of 24.2 percent.
The difference in saving rates has encouraged trade between US and China as the former tries to reduce domestic deficit, and the latter tries to invest the surplus. However, balance of trade is tilted to the favour of China (Morrison and Labonte 1; Schnabil and McKinnon 1).
Difference Between US Market Economy and China’s Socialist Market
The People’s Republic of China (PRC) practises a type of market known as “Market Socialism”. This type of market is characterized by ownership of means of production by the communist party or the state. The United States, on the other hand, practices a democratic market or what has come to be known as “free market”.
Although the PRC has been trying to decentralize its economy and move towards capitalistic economy, much of its assets are still under the control of the state. The PRC has a strong influence on the currency as it still maintains total control of Commercial Banks.
Huang (118) asserts that in 1995 China forced private companies like Urban Credit Cooperatives (UCC) to surrender a bulk of shares to the municipal governments.
Although both the United States and China have invested heavily in each other’s economies, the balance of trade favours China. Between 2003 and 2009, the US capital provided 29.0 percent of foreign direct investment (FDI) in China.
However, the investment of People’s Republic of China (PRC) in the United States has been substantially smaller. For example, during the same period (2003-2009), PRC contributed to less than one percent of US inflows.
Comparatively, the average total foreign investment between the two countries has been $ 84 billion per year in the United States and $ 91 billion per year in China indicating a US trade deficit (Hufbauer and Woollacott 3).
China has adopted an economic policy that enables it to intervene in currency markets and limit its appreciation against the dollar (and other currencies). This has made it not only the world largest holder of foreign exchange, but also the fastest growing holder. As of June 2011, China was holding $ 3.2 trillion. China recycles some of this money back to the U.S. through investing in U.S. shares and long-term treasury bills (T-Bills).
Why China Is Keeping the US Dollar in its reserves
The major reasons as to why China is keeping the US dollar in its reserves is to prevent the China’s currency (renminbi) from appreciating against the dollar, and thus they have to purchase more and more dollars. Consequently, China’s foreign exchange reserve as of June 2011 grew to a staggering amount of $ 3.2 trillion (Morrison and Labonte 4).
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Quality control issues faced by China in exporting materials to the US: Corporation or Chinese problem?
The US has adopted stringent quality control measures against goods imported from China because it believes that China could be exporting some inferior goods to the US market, and thus turning the US market into a dumping site for low quality products.
The saving rate differences between the US and China has spurred trade between the two nations. Because of the low saving rate in US, its economy is dependent on nations like China, which has high saving rates. However, the balance of trade is tilted towards China.
China has a trade surplus and thus exports this surplus to US in form of foreign direct investments (FDI). The Chinese government has amassed large US dollar in its reserves so as to prevent the currency (renminbi) from appreciating against the dollar.
Although China and United States are trading partners, their markets are quite different. The use practises a market economy while China’s market is socialistic. The latter dictates prices while the former is a free market where prices are determined through laws of demand and supply.
Despite their cooperation in trade, the United States and China are engaged in occasional trade in regards to quality of goods. The United States accuses China of turning its market into a dumping site of low quality goods.
Huang, Yasheng. Selling China: Foreign Direct Investment during the Reform Era, Cambridge: Cambridge University Press, 2003. Print.
Hufbauer, Gary, and Jared Woollacott 2010, Trade Disputes Between China and the United States: Growing Pains so Far, Worse Ahead? PDF file. 6 Dec. 2012. <https://piie.com/publications/wp/wp10-17.pdf>.
Morrison, Wayne, and Marc Labonte. China’s Holdings of U.S. Securities: Implications for the U.S. Economy, Washington DC: Congressional Research Service, 2011. Print.
Schnabl, Gunther, and Ronald McKinnon. “China and Its Dollar Exchange Rate: A Worldwide Stabilising Influence?” The World Economy 35.1 (2012): 1-27. Print.