Some Observations on U.S.-China Economic Relations

Breakfast with the Fed

The rapid growth of the Chinese economy since the late 1970s has moved U.S.-China economic relations to center stage. A recent presentation by Cletus C. Coughlin, deputy director of research at the Federal Reserve Bank of St. Louis, examined some of the key U.S.-China economic issues.

Coughlin spoke May 18 at a “Breakfast with the Fed” event sponsored by the Federal Reserve Bank of St. Louis - Louisville Branch and the World Affairs Council. The event was held at the Louisville Branch with more than 30 business leaders, university professors and community development leaders in attendance.

Coughlin began by identifying the channels through which the integration of China into the world economy has affected the United States. The integration of China can be viewed as a large increase in the supply of labor, primarily— but not exclusively—of low-skill labor. Such an increase has tended to reduce the wages of low-skill workers in the United States relative to high-skill workers.

A second impact is that the prices of Chinese exports relative to imports should decline, Coughlin explained. As a result, U.S. consumers in general should benefit from the lower prices of Chinese goods shipped to the United States.

Finally, because Chinese growth has required large imports of oil, Coughlin said that it is likely that increasing Chinese demand has pushed up oil prices worldwide. In light of the substantial U.S. imports of oil, it is probable that the United States is harmed by this development.

Coughlin also discussed two U.S. issues with China and China’s growth prospects. With respect to the large U.S. trade deficit with China, Coughlin argued that macroeconomic conditions rather than the Chinese were the primary reason for the deficit. Furthermore, Coughlin said that an appreciation of the Chinese currency is unlikely to have a significant effect on this deficit. With respect to U.S. manufacturing employment and wages, the Chinese integration into the world economy is simply one of many factors contributing to the declining share of manufacturing in total U.S. employment and to the lack of growth in real wages.

Turning to growth, Coughlin argued that China’s short-run growth prospects are excellent. In light of abundant labor in rural areas, sufficient labor will be available to support growth in the near term. Over a longer horizon, however, numerous challenges, especially one stemming from an aging population, make long-run growth prospects more problematic.