U.S. - China Trade Relations: Using Current Events to Teach International Economics

Dr. Margaret A. RayProfessor of Economics, University of Mary Washington

Director, UMW Center for Economic EducationMRAY@UMW.edu

PowerPoint and resource list available at: http://mrayapecon.umwblogs.org and on the NCSS website

U.S. (Mis)Perceptions of U.S.-China Trade • More than half of Americans mistakenly see China as the

world’s largest economy. • 63% say that “more jobs are lost from imports” while

only 8% say “more jobs are gained from exports.” • 53% say that “free trade between the US and other

countries” loses more jobs than it creates.

Americans and the World: Public Opinion on international affairshttp://www.americans-world.org/digest/global_issues/intertrade/reservations_trade.cfm

Common Fears About U.S. – China Trade• China will overtake the U.S. as the world’s

largest economy• China steals U.S. factory jobs (trade deficit)• China’s manipulation of its currency hurts the

U.S. economy (undervalued Yuan)• China controls the U.S.

because it finances our debt

China’s Economy“China will overtake the U.S. as the world’s largest economy”

•By 2020 China is projected to overtake the US to lead the list of the world's top ten largest economies by GDP measured in PPP terms – Euromonitor Global Research

•China is the fastest growing market for U.S. exports.

U.S. – China Trade Deficit“China steals U.S. factory jobs”

“We specialize in innovation. We start new industries. We create new products. (When an industry matures) we lose our comparative advantage. That’s when the rest of the world increases its comparative advantage and those jobs gradually move overseas. That is a sign of our success – that we are continually exporting jobs.” – Erica Groshen, FRB New York

U.S. Dollar/Yuan Exchange Rates“China’s manipulation of its currency hurts the U.S. economy”

•China pegs its currency to the U.S. dollar at about 6.83 yuan per dollar.•An artificially low value of the Yuan is a de facto subsidy for Chinese exports to the U.S (Congressional Research Service 7-5700, www.crs.gov)

Chinese Ownership of U.S. Debt“China ‘controls’ the U.S. because it finances our debt”

In 2011, foreigners owned $4.45 trillion of U.S. debt, which is equal to 32% of the total debt.

"Treasury Direct-Monthly Statement of the Public Debt Held by the U.S.-January 2011" (PDF). http://www.treasurydirect.gov/govt/reports/pd/mspd/2011/opds012011.pdf. Retrieved May 18, 2011.

The Real Story: National Standards• Standard 5 : Trade

Voluntary exchange occurs only when all participating parties expect to gain. This is true for trade among individuals or organizations within a nation, and among individuals or organizations in different nations.

Related concepts: Barriers to Trade, Barter, Exports, Imports, Voluntary Exchange, Exchange, Exchange Rate• Standard 6 : Specialization

When individuals, regions, and nations specialize in what they can produce at the lowest cost and then trade with others, both production and consumption increase.

Related concepts: Division of Labor, Production, Productive Resources, Specialization, Factor Endowments, Gains from Trade, Relative Price, Transaction Costs, Factors of Production, Full Employment

• AP Economics

Comparative advantage, absolute advantage, specialization and exchange

Open Economy: International Trade and Finance Balance of payments accountsForeign exchange marketNet exports and capital flowsLinks to financial and goods markets

Economic ModelsImports, Exports, Voluntary Exchange: Circular Flow Model

Chapter 5: The Circular Flow of Income and Producthttp://www.uri.edu/artsci/ecn/starkey/590/Macro_ch05_v2.pdf

Comparative Advantage and Trade: Production Possibilities CurveDallas Fed’s Everyday Economics: International Trade

Foreign Exchange Markets: Supply and DemandDallas Fed’s Everyday Economics: Globalization

The Circular Flow with International Sector

http://www.uri.edu/artsci/ecn/starkey/590/Macro_ch05_v2.pdf

Curriculum Ideas Koppel on Discovery: The People’s Republic of Capitalismhttp://dsc.discovery.com/convergence/koppel/highlights/highlights-02.htmlThe American and Chinese economies are irreversibly intertwined. The common complaint that the Chinese are taking jobs away from American workers is in many cases true. China's cheap and abundant labor attracts manufacturing from all over the world. Still, economists estimate that the U.S. is as much as $70 billion richer each year because of its relationship with China —something must be going right. The Choice: A Fable of Free Trade and Protectionism by Russell RobertsA novel on the global economy in which the ghost of David Ricardo explains the argument for free trade to the CEO of an American manufacturing firm (and therefore the students reading the book), without using economic jargon.http://www.invisibleheart.com/Iheart/CSampleC1.html Teacher’s Guide and Student Questions: ttp://www.invisibleheart.com/Iheart/CGuide.html Big Mac Index : Council for Economic Education, EconEd Link, The Big Mac Index. CEE, EconomicsMinute. http://www.econedlink.org/lessons/index.php?lid=156&type=studentThe Economist, Big Mac Index. http://www.economist.com/blogs/dailychart/2011/07/big-mac-indexBusiness Insider, Big Mac Index and the Yuan. http://articles.businessinsider.com/2011-08-02/markets/29955633_1_rmb-china-ingenious-way Interactive Infographics GDP: http://money.cnn.com/news/economy/world_economies_gdp/ The World’s Best Countries: http://www.thedailybeast.com/newsweek/2010/08/15/interactive-infographic-of-the-worlds-best-countries.htmlState Exports to China: https://www.uschina.org/public/documents/2011/03/full_state_report.pdf Visualizing The US China Trade Relationship Across the Globe and China vs. US: A Visual Comparison (Posters)http://www.mint.com/blog/trends/visualizing-uschina-trade-relations/ http://www.mint.com/blog/trends/china-vs-united-states-a-visual-comparison/

International Trade Game (Dr. Dennis Weidenaer)

Comparative Advantage and Trade Worksheet (Margaret Ray)

The People’s Republic of Capitalism

A short novel on the global economy in which the ghost of David Ricardo has to earn his wings by explaining the argument for free trade to the CEO of an American manufacturing firm (and therefore the students reading the book), without using economic jargon.

The book presents the key international issues facing the U.S. And examines how international trade affects business and peoples’ daily lives.

The Choice

The Big Mac Index

http://www.economist.com/blogs/dailychart/2011/07/big-mac-index

Big Mac Index Says The Yuan Is Actually Valued Just RightVincent Trivett|August 02, 2011http://articles.businessinsider.com/2011-08-02/markets/29955633_1_rmb-china-ingenious-way#ixzz1eXpN26cZ

http://www.econedlink.org/lessons/index.php?lid=156&type=student

An EconomicsMinute lesson from CEE looks at how the The Economist’s “Big Mac Index” helps to explain variations in exchange rates and prices.

http://money.cnn.com/news/economy/world_economies_gdp/

Interactive Infographics: GDP

Interactive Infographics: Various Measures

https://www.uschina.org/public/documents/2011/03/full_state_report.pdf

Interactive Infographics: State Exports to ChinaThe website also includes detailed data regarding what and how much each individual state exports to China

http://www.mint.com/blog/trends/visualizing-uschina-trade-relations/

Poster: Visualizing U.S.-China Trade Relations

http://www.mint.com/blog/trends/china-vs-united-states-a-visual-comparison/

International Trade GameDr. Dennis Weidenaer

General Directions for Teacher• Divide the class into 5 nations• Give each nation a packet of materials• Tell each nation they have 10 minutes

to produce all 6 categories of output listed in their instructions

• Give NO OTHER INSTRUCTIONS – let them discover that they will need to trade and establish their own terms of trade

• Debrief the activity by showing comparisons of quality of production, innovation, etc. Ask the question “Why are some nations better at production than others?”

Inventory of Packets10 blue paper5 white paper1 green pen 3 gold paper1 glue 2 salmon paper

1 yellow pen5 green paper 1 blue pen5 salmon paper 1 glue1 blue pen1 yellow pen 3 white paper1 box paper clips 4 gold paper

3 salmon paper2 white paper 1 black pen3 gold paper 1 yellow pen5 green paper 1 ruler1 black pen1 red pen1 scissors

International Trade Game Student Instructions

Each Nation has 10 minutes to produce each of the following;

• Food: 4 strips of gold paper 3” by 1”• Clothing: A green “T”, 4” high• Shelter: A white square, 2” high and a salmon-colored

triangle• Industry: A 5 link paper chain with each link a different

color• Education: A four page book made of 2 colors• Energy: One blue 5” square

Comparative Advantage and Trade ExerciseWorksheet handout provided Word file of worksheet available on UMW blog or conference materials website.

Key:The U.S. has an absolute advantage in apparel and equipmentPortugal has an absolute advantage in neitherThe opportunity cost of 1 unit of equipment in the U.S. is 1 unit apparel.The opportunity cost of 1 unit of apparel in the U.S. is 1 unit equipmentThe opportunity cost of 1 unit of equipment in China U.S. is 3 units apparel (note: 30 : 90 = 30/30 : 90/30 = 1:3)The opportunity cost of 1 unit of apparel in China is 1/3 unit equipment (note: 90 : 30 = 90/90 : 30/90 = 1 : 1/3The U.S. has a comparative advantage in equipment (U.S. opportunity cost is lower than China’s, $1 versus $3)China has a comparative advantage in apparel (China’s opportunity cost is lower than the U.S., $.33 versus $1)

Without Trade With Trade With Trade (production) (consumption)

Apparel Equipment Apparel Equipment Apparel Equipment

China 30 20 90 0 45 50

U.S. 50 50 0 100 45 50

Total 80 70 90 100 90 100 What happens to total world production when the countries specialize and trade? It increases. What economic concept describes this result? Comparative Advantage

Are the countries better off as a result of trading? No, The U.S is not (45 and 50 after versus 50 and 50 before). What determined whether trade made the countries better off? The terms of trade (assuming each country exported half). The U.S. would not trade if it was made worse off. The terms of trade would need to be different. However, the example shows that the benefits from trade may not be shared equally or equitably.

Find the terms of trade need to be for these countries to be willing to trade:The U.S. would have to receive more than 1 unit of apparel for a unit of equipment and China is willing to pay less than 3 units of apparel for a unit of equipment, so they can agree on a price between 1 and 3 units of apparel fro a unit of equipment.China would have to receive more than 1/3 units of equipment for a unit of apparel and the U.S. is willing to pay less than 1 unit of equipment for a unit of apparel, so they can agree on a price between 1/3 and 1 unit of equipment fro a unit of apparel..

ReferencesArticles•The myth of America’s decline by Rob Asghar. http://www.cnn.com/, 11/17/2011.•Fiction still drives the U.S.-China trade debate by Daniel Ikenson. http://www.cato-at-liberty.org/fiction-still-drives-the-u-s-china-trade-debate/, 9/21/2011.•Higher labor pains in U.S.-China trade? By Kevin Voigt. http://www.cnn.com/, 9/27/2011.•How much does US-China trade hurt American workers? Slowly a clearer picture by Mark Trumbull. http://csmonitor.com/Business/2011/0510/How-much•Most Americans think China is No. 1 economy; it isn’t by Kathy Chu. http://www.usatoday.com/, 2/15/2011.•4 US misperceptions about China’s economy. http://www.chinadaily.com.cn/opinion/2011-05/16/content_12520233.htm, 5/15/2011.•Free trade and comparative advantage by Bob Mittelstaedt and Is China rising? Is the U.S. declining? by Clyde Prestowitz. http://www.futureofuschinatrade.com/issue/china-rising-us-declining.•Confronting China-US economic imbalance by Roya Wolverson. http://www.cfr.org/china/confronting-us-china-economic-imbalances/p20758, 10/19/2010.•In China’s debt by James Fallows in The Next Economy: The Debt Issue, a Special Supplement to The Atlantic, Fall 2011, page 22.

Reports•Congressional Research Reports•China’s economic conditions, June 2011. http://www.fas.org/sgp/crs/row/RL33534.pdf•China’s currency: An analysis of the economic issues, August 2011. http://www.fas.org/sgp/crs/row/RS21625.pdf•Is China a threat to the US economy? http://www.fas.org/sgp/crs/row/RL33604.pdf•China-US trade issues, August, 2011. http://www.fas.org/sgp/crs/row/RL33536.pdfEast Asia Institute•US-China relations series, July 2011. http://www.eai.or.kr/data/bbs/eng_report/2011070516401177.pdf•Public perceptions of US-China relations, July 2011. http://www.eai.or.kr/data/bbs/kor_report/20110705177148.pdf WebsitesUS Census Bureau, international trade data – China: http://www.census.gov/foreign-trade/balance/c5700.html

UCLA Asian American Studies Center, U.S./China Media Brief: http://www.aasc.ucla.edu/

USC US-China Institute: http://china.usc.edu/

FutureofUSChinaTrade.com - Arizona State University and The Kearny Alliance: http://www.futureofuschinatrade.com/about-us

Office of the United States Trade Representative – China: http://www.ustr.gov/countries-regions/china