Myths about US-China Trade

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Myths about US-China Trade The US and China are the globally largest and third largest trading nations, respectively, and the US-China trade is one of the most important bilateral trading relations in the world. China is now the United States’ second largest trade partner, overtaking Mexico. In 2007, China surpassed Canada as the largest import supplier, and surpassed Japan as the United States’ third largest export market. However, there are many muddled ideas in the US-China trade. Politicians, business leaders, and even economists frequently make statements that do not stand up to careful economic analysis. Open the business section of the newspaper, news magazines, or TV programs and you probably find articles that make foolish statements about US-China trade. Five misconceptions in particular have proved highly persistent, and out trade theory can be used to see why they are incorrect. Countries engage in international trade for two reasons, each of which contributes to their grains from trade. First, countries trade because they are different from each other. The differences may lead to comparative advantage for each nation in different products. Nations can be better off when each nation specializes in and export the products in which they have a comparative advantage. Second, countries trade to achieve scale economies in production. That is, if each country produces only a limited range of goods, it can produce each of these goods at a larger scale and hence more efficiently than if it tried to produce everything. The Ricardian model emphasizes that international trade is determined by comparative advantage (CA), not absolute advantage (AA). CA is the ability for a country to produce a good at lower opportunity cost, relative to other countries. Two implications may be derived form the model. First, gains from trade depend on CA rather
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