US-China Trade Deficit: A Result of Changing International Distributions of Power

Chinas Portion of the US Trade Deficit (large)

The trade deficit between the United States and China can be explained by the changing international distributions of power. The United States is descending from its position as the hegemon due to its waning influence in world politics and China is ascending in its influence and stature in world politics. This phenomenon has created an imbalance in the distribution of power and has prevented the United States from pursuing fair trade agreements with China. Moreover, it has allowed to China to pursue its economic goal unilaterally without making concessions and sacrifices that are traditionally shouldered by the hegemon.

This essay will analyze the downfall of US hegemony and develop arguments for the increasing Chinese influence to explain the trade deficit using concepts such hegemonic stability theory, prospect theory and governance structure. It will analyze China’s unwillingness to step up as a hegemon and how it gives allows China unfair advantage in international trade. Lastly, it will try to use historical and contemporary evidence to explain the ramifications of the current “trade war” between the United States and China on the world economy.

According to Stephen Krasner, the hegemon is a dominant state that facilitates free trade by offering positive and negative incentives. Positive incentives include giving states access to a larger market and to its relatively cheap exports and negative incentives include withholding foreign aid or grants and competing with weaker states in small markets. The hegemony, due to its size and economic prowess, also tend to have a stable international monetary system, which they can use to offer liquidity needed to create open trade structures[1].

The United States has played the role of hegemon in the international political economy since World War II. However, as Krasner points out, declining economic growth and the emergence of new economic powers such as China and India has slowly diminished America’s role as a hegemon since the 1960’s. This decline has become more pronounced since the recent economic downturn as the U.S. moves towards a jobless recovery and aggressively pushes for protectionist measure against China instead of espousing free trade.

China, on the other hand, has taken advantage of post World War II free trade policy with a controlled currency, strong national policies and public investments in industrial sectors such as renewable energy[2]. They have been the biggest beneficiaries of free trade policies carried out by the capitalist countries. As a result, they have been able to sustain unprecedented growth, even during the 2009 recession, and depreciate their currency to outpace the U.S. in exports.

China’s unwillingness to liberalize their economy to the same extent as the U.S. has allowed them to benefit from U.S. liberalization without having to make the concessions that the US has made as the hegemon. However, since US hegemonic power has continued to decline, China has been unwilling to step in and fill in the role as hegemon. This is due to both economic and political factors. Economically, China is unwilling to take on the costs and sacrifices it takes to help create and sustain the structures and institutions necessary to keep international trade open and free. Politically, China’s Maoist/nationalist governance structure has allowed them to unilaterally implement trade policies without having to face domestic pressure.

This is in sharp contrast to the US, which not only fulfilled the role of hegemon by facilitating free trade but has also had to balance domestic pressures from industries and unions.

Furthermore, the function of US Gross Domestic Product that is reliant on trade is much higher today than it was in 1929 which has made it are more sensitive to trade volatility and deficit. Lastly, increasing gap in income has made US workers much for vulnerable to international trade volatility. As substantiated in prospect theory, which states that, we care more about losses than gains, US workers fear outsourced jobs and lower wages more than they anticipate a growing economy as a result of free trade. Trade in the US has become politicized and democracy has made the US an inefficient arbiter of trade policies as it is reflected the current trade deficit against China.

Historically, countries have wanted some protectionists measure to win small benefits and advantages over other nations and to protect its infant industries. However, in most cases, protectionist measures that have escalated into trade wars have not benefitted the competing nations or the international economy. The Smoot Hawley Tariff, which was a protectionist policy enacted by US Congress, led to trade wars and terrible economic outcomes. More recent protectionist policies such as the Obama administrations move to put tariffs on Chinese tires had no impact on domestic tire production or employment[3]. The Chinese duty on American poultry is seen as retaliation against American duty on tires. This is a clear example of escalating trade war.

Although nations today are more aware of the ramifications of protectionism and more safe guards exist protect against a global domino effect of protectionist policies through institutions such as the World Trade Organization, there are still concerns that remain. The trade wars between China and US might escalate to a greater scale today because most nations still follow the US as the hegemon. US policies against Chinese exports will be emulated by a vast majority of countries around the world.  In 2002, for example, US import restrictions on Chinese steel led nine other economies to impose similar restrictions against Chinese steel[4]. The anti-China backlash could not only cause the fragile world economy to worsen, but it might also have political repercussions.

World Trade Organization policies can also intensify the trade wars. It is prescribed in the WTO rules that if China violates trade rules than countries are allowed to retaliate with their own measures. Furthermore, if one country limits Chinese imports than other WTO members can follow suit without investigation. These policies make the protectionist backlash much worse by approving and allowing it. Lastly, trade and monetary system (flexible exchange rates and value of currency) are related and since one of the main reasons for US – China trade deficit is the deliberate depreciation of its currency, the WTO cannot control China nor can it prescribe any impartial solution.

The decline in U.S. economic growth coupled with the rise of other economic powers houses such as China and India points to downward trend in America’s role as the hegemonic power post World War II. The pattern of decline is similar if not parallel to Britain’s decline as hegemonic power. The implications of Krasner’s theory on U.S. politics are based on the country’s response to its declining prowess. It is not yet evident whether America is ready to step down from its informal role as the hegemonic power (although the current financial crisis and domestic problems indicate a shift in political attention towards the home turf). China has experienced economic growth without having to radically involve itself in building the international political structure that has made its growth possible. Krasner’s theory paints a picture of the world without U.S. hegemony, which may be for America’s best interest, but it remains to be seen if it for the rest of the developing world.