China:

Changes in Trade, Exchange Rates,

& Trade War

Madeline Jentz | Halle Morel

Sylwia Prawuckal | Grant Weddle

China’s

Trade History

A Look into China’s Past

Trade Timeline

• 207 BCE- 220CE: Foreign Trade Began with the Western Han Dynasty
• Start of the Silk Road (Eastern Han, Tang (Golden Age), Yuan Dynasties)
• Silk Road: network of trade routes that connected the East and West or connected China to the Middle East and Southern Europe
• China extended the great wall of China in order to better protect their trade routes
• Silk was the most common good traded from China
• Teas, sugar, salt, porcelain
• imported goods: cotton, wool, ivory, silver and gold
• Not only was the silk road used for the trade of good but many other things as well
• religion, philosophy, diseases, technologies and culture

Trade Timeline

• Silk Road came to an end in the 15th century when trade by sea became cheaper, faster, less dangerous and less harassment and easier to carry mass amounts of goods
• over all foreign trade did not account for a large impact on the Chinese economy during this time
• Ming Dynasty (1368-1644): during this time the Ming Dynasty had the largest economy in the world, many technological advancements and is known as one of the three Golden Periods in Chinese history
• Early on the Ming Dynasty defeated the Mongols from power in China, Emperor Hongwu restricted merchants and banned trade focusing solely on agriculture and making China self sufficient
• After Ming, successor emperors reversed these policies and the merchants began heavily trading again, the dynasty encouraged trade by building new roads, canals and bridges
• Strong trade relations with Europe and Japan: China imported large amounts of silver (about 190 billion dollars in today's money)and modern weapons

Trade Timeline

• Qing Dynasty (1644-1911)
• Due to many wars and the overthrow of the Ming Dynasty the economy of China was suffering
• Trade grew at about 4% each year
• Attempted to hinder trade and keep China closed off but the wealthy merchants were too powerful and the government was unsuccessful in stopping them
• 20th Century China:
• 1912-1949: China increased exports drastically during the World Wars
• China’s economy was highly affected by internal conflict between warlords in the early 20th century and then the occupation of Japan later on in Manchuria, causing a suffering economy and a decrease in trade
• 1930s during the depression, the Chinese agriculture community suffered greatly forcing China to import mass amounts of food to support the people (1932- 15 million bushels of grain were imported compared to 900,000 bushels of grain in 1928)
• After the Japanese invasion China only had an output of 25% of what the output was before the war

People's Republic of China and Trade

• During the 1950s and 1960s, trade only accounted for 2% of the gross national product (GNP)
• 50s: China imported industrial equipment from Russia for the development program of the first 5 year plan.
• 60s: self reliance plan followed by the cultural revolution: trade drastically decreased including industrial development, focused only on importing needed agricultural products
• Acceleration of trade in the 1970s through continued modernization and growing relations with Western Countries
• Imports: food, cotton, raw materials (chrome), chemical fertilizers and steel products
• Exports: Oil was very important and doubled its export and helped trade to grow at about 9% per year

1980s People’s Republic of China

• goal was to open markets to the outside world in order to promote growth, period of decentralization
• 79- created the four economic zones in China: Shenzhen, Zhuhai, Shantou and Xiamen: they focused on increasing foreign investments, increasing exports as well as import technology for further advancement
• China joined numerous foreign trade organizations and the government loosened control on trade as well relying more on the balance of trade to work on its own
• 1982: Ministry of Foreign Economic Relations and Trade was introduced
• Main goal was to help and supervise foreign trade policies

Open Door Policy, 1978, Deng Xiaoping

Major Events in Chinese Trade History

• Opium Wars: Both led to unequal treaties, commercial privileges and legal and territorial concessions over China
• 1st: 1839-1842, China and Great Britain: China’s attempt to stop the high opium addiction in China by cutting off Britain from importing it to China, eventually leading to increase number of trading ports on China’s coast for Britain
• 2nd: 1856-1860, China and Great Britain and France, wanted further trading dominance, established the Treaty of Tianjin: gave Great Britain and France residency for their troops, opened more ports for trade, freedom to travel in China for Christian Missionaries and legalization of Opium
• https://www.youtube.com/watch?v=yWyEB9cpIPw
• Ministry of Foreign Economic Relations and Trade
• worked with the State Planning Commission to build long term foreign trade and quota plans
• supervise foreign trade corporations and enterprises
• coordinate trade with foreign governments and international economic organizations

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China:

Current Trade

Present Day Exports, Imports,

& Trade Partners

From past to present trade

• For more than 500 years, from the 15th to the 20th century, China’s economy slowed down
• In 1820, Gross Domestic Product (GDP) of China was still 30% higher than the total GDP of Western Europe
• Before 20th century, trade was self-contained in trade zones
• Economic reforms that began in the late 1970s reversed 500 years of trade history

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A perspective and analogy on China’s global trade

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Trade in China

China’s Trading Pattern

• China has followed a trade pattern that consistently incurs trade deficits with its Asian neighbors
• Trade deficit by importing machinery and equipment, and high tech part and components arrive from Japan, Korea, and Taiwan and by importing raw materials and natural resources from the Association of Southeast Asia Nations (ASEAN) and Australia
• China’s neighbors have been making use of China’s huge domestic market as a source of their own economic growth.

Processing trade in China

• The processing trade, which has become hugely popular in China, involves domestic firms obtaining raw materials or intermediate inputs from abroad, processing them locally, and exporting the value-added goods.
• Thanks to China’s open-door policy, particularly the establishment of special export zones, its processing trade has grown rapidly. It now constitutes roughly half of China’s total trade.
• The three ports with the largest share of processing imports are Shanghai, Shenzhen and Nanjing, comprising more than 55 per cent of China’s total processing imports in 2015

General Trade in China

• General trade refers to the import or export of goods by enterprises in China with import-export rights.
• General trade, which has a higher added-value than processing trade, increased in volume and proportion in 2017
• General trade was up 1.3% points from 2016

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China’s Trade Partners

TRADE DEFICIT

China’s Customs Statistics: Imports

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Trade in China

Export-oriented pattern of Economic Growth

• China has become a strong integrating force in the global economy
• Almost 60% of China’s trade is made up of processing trade
• Because China has to import before it can export, all sorts of parts and components as well as natural resource products are imported from its Asia-Pacific neighbors
• China is is a critical link for all the major international supply chain

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China’s Trade Partners

TRADE SURPLUS

TRADE DEFICIT

China’s Customs Statistics: Exports

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Changing Pattern of Chinese Exports

• For much of the last 20 years, Chinese export industries have been dominated by manufacturing and consumer goods to rich and advance countries
• China is shifting emphasis of exports towards selling heavy industry products to developed and developing countries
• For example, overseas sales of construction equipment and machinery and telecoms network gear are high-value and higher profit products
• These products will make it easier for Chinese companies to pay higher wages to their employees
• There is a shift away from developed country markets toward fast-growing developing nations like Africa

Hong Kong Trade Development Council

Trade Relations

Trade Relations in China

• Founding member of the Asian Infrastructure Investment Bank (AIIB)
• Member of the World Trade Organization (WTO)
• Member of the Asia-Pacific Economic Cooperation (APEC)
• Member of the Pacific Economic Cooperation Council (PECC)
• Member for the United Nations Economic and Social Commission for Asia and Pacific (ESCAP)
• Observer of the Trade Committee of the Organization for Economic Cooperation and Development (OECD)

Asia-Pacific Economic Cooperation (APEC)

November 6-7, 1989

• Australia
• Brunei
• Canada
• Darussalam
• Indonesia
• Japan
• Malaysia
• New Zealand
• Republic of Korea
• Singapore
• Thailand
• The Philippines
• The United States

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November 12-14, 1991

• Chinese Taipei (Taiwan)
• Hong Kong
• People’s Republic of China

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November 17-19, 1993

• Mexico
• Papua New Guinea

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November 14-15, 1994

• Chile

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• Peru
• Russia
• Viet Nam

November 14-15, 1998

APEC and the Rise of China

APEC

Advantages for China

• 60-70% of China’s Trade and FDI stemmed from the APEC region
• 8-9 of China’s Top 10 Trade Partners are APEC Members

During the Beijing APEC Summit in 2014, leaders agreed to start a joint strategic study on the Free Trade Agreement Area of the Asia-Pacific (FTAAP), marking its official launch

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CHINA INTERNATIONAL IMPORT EXPO 2018

President Xi Jinping announced China will hold Expo on May 14, 2017:

• First China International Import Expo
• November 5-10, 2018
• At National Exhibition and Convention Center in Shanghai
• Supporters:
• World Trade Organization
• United Nations Conference on Trade and Development
• United Nations Industrial Development and Organization

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CHINA INTERNATIONAL IMPORT EXPO 2018

Purpose:

• Develop mutual-benefit and win-win economic and trade partnerships
• Construct the free trade network with countries participating in Belt and Road Construction
• Drive the trade and investment facilitation and all relevant countries
• Assist in regional and global economic growth

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The State Council of China move to readjust the country's balance of foreign trade

Article - China Looks to Proactively Boost Level and Range of Imports, July 24, 2018

BROADENING IMPORT SOURCES

DIVERSIFYING TRADE CHANNELS

Import Initiatives

TRADE LIBERALISATION AND FACILITATION

Current Challenges for Trade

• China’s high rate of corruption makes ethical challenges for global trade ventures

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• China’s excessive investment and the practice of export-led growth leads to depependnace on high consumption rates

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• China continues to experience growing debt in the economy ($14 Trillion U.S. dollars)

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• China’s efforts for high quality and innovation has resulted in competitive challenges coming for lower-unit cost countries like Vietnam, Mexico, Bangladesh, and Indonesia, especially in the cheap textiles and household goods industry

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Made in China

• Do you consciously look for the country where your products are made?
• What does the label, “Made in China,” imply to you?
• What level of quality? Which price point?
• What does the label, “Made in the USA,” imply to you?
• What level of quality? Which price point?
• Does the country where your products are made make a impact on your purchasing decision? Why?

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Trade War

What is a trade war?

ˈtrād ˌwôr/

noun

a situation in which countries try to damage each other's trade, typically by the imposition of tariffs or quota restrictions.

Tariffs are the weapons of a trade war.

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Since the mid-1990s, when China’s entry into the world trading system was broached for the first time, international corporations have become highly dependent upon Chinese factories.

The trade between the United States and Chinese ports, for over a decade has grown to almost $700 billion every year.

“America First Strategy”

• President Trump imposed tariffs on $50 billion in Chinese products.
• This decision was part of the “America First Strategy”
• It took Beijing little more than an hour to fire back,

Targeting agricultural goods, cars and energy

Chinese officials founded a research and development program aimed at reducing their dependence on U.S. companies for key components such as semiconductors.

• Administration officials believe that China needs the $20 trillion U.S. market more that American businesses need China. On the other hand, China doubt that the U.S. strategy will succeed.

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Trade War Timeline, 2018

Jan. 22 — Trump imposes a new tax on solar panels — a key Chinese export

March 1 — Trump hikes tariffs on steel and aluminum imports

April 2-6 — China proposes tariffs against the United States, sparking week-long tit-for-tat that significantly escalates tensions

April 16 — U.S. Commerce Department bans exports to Chinese telecom company ZTE

June 7 — Trump administration eases ban on ZTE

June 15 — Trump announces 25 percent tariff on $50 billion of Chinese goods. China responds with a targeted retaliation.

June 18 — Trump threatens to impose tariffs on additional $200 billion worth of Chinese goods

June 27 — Trump calls on Congress to “enhance” review process governing Chinese investment in U.S. technology

July 6 — Washington levies tariffs on $34 billion of Chinese imports and Beijing retaliates immediately.

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How to win a trade war?

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China’s

Exchange Rate

Policies & Goals

What is an Exchange Rate?

An exchange rate is the price of a nation’s currency in terms of another nation’s currency.

Floating VS Fixed Exchange Rate

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Floating Exchange Rate allows the value of a currency to move with market forces.

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Fix Exchange Rate keeps the value of a currency static against another currency.

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China’s Exchange Rate Policy

China’s central bank decided to use a fixed exchange rate policy.

This policy helped facilitate international trade.

By having a fixed exchange rate foreign buyers can plan on prices of chinese goods to be very consistent.

But this limits China’s Monetary policy tools.

Exchange Rate Stabilization (Currency Pegs)

China fixed its exchange rate in 1995 at roughly 8 yuan to 1 US dollar until 2005.

Today China pegs its currency to a basket of 13 foreign currencies.

Each currency in the basket is weighted differently. The Dollar holds ⅓ of the basket weight.

https://fred.stlouisfed.org/series/EXCHUS

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How Does China Change the Value of its Currency?

In the 80’s China began accumulating large amounts of dollar reserves. Today China is estimated to hold 3.2 trillion US dollars.

To raise the value of the Yuan, China’s central bank sells foreign currency reserves into the market.

To weaken the Yuan China buys foreign currency.

Questions

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• When China removed the peg to the US dollar in 2005, how did this impact each nations respective interest rate?

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• Should China continue their fixed exchange rate policy and keep their currency artificially low against the dollar?

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• Who do you think is more dependent, China from the U.S. or the opposite? Who do you think will win trade war?

bibliography

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https://www.barrons.com/articles/the-brewing-u-s-china-trade-war-explained-in-charts-1523052689

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https://fred.stlouisfed.org/series/EXCHUS

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https://www.frbsf.org/economic-research/publications/economic-letter/2017/october/china-exchange-rate-policies-and-us-financial-markets/

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https://www.fxcm.com/insights/how-does-china-control-exchange-rates/

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http://english.mofcom.gov.cn/article/zt_englishimport/index.shtml

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https://thediplomat.com/2018/02/the-significance-of-chinas-international-import-expo/

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https://www.tutor2u.net/economics/reference/china-economic-growth-and-development

https://www.reuters.com/article/us-usa-trump-asia-idUSKBN15800V

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https://www.washingtonpost.com/news/worldviews/wp/2018/07/05/a-timeline-of-how-the-u-s-china-trade-war-led-us-to-this-code-red-situation/?utm_term=.f00a69f62883

https://www.apec.org/About-Us/About-APEC/Member-Economies.aspx

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https://www.washingtonpost.com/business/economy/trump-imposes-import-taxes-on-chinese-goods-and-warns-of-additional-tariffs/2018/06/15/da909ecc-7092-11e8-bf86-a2351b5ece99_story.html?utm_term=.4a45e8f3f522

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