MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

YOU DECIDE:Should we worry about or welcome trade with China?

By Dr. Mike Walden
North Carolina Cooperative Extension Service

The big economic story of the last five years has to be China. From a virtual closed economy less than a generation ago, China may well be the world's largest economy less than a generation from now. From oil exporter, China is now the second largest oil importer. And from a country that shunned the West, China now embraces Western technology and products.

This dramatic emergence of the Chinese economy has caused economic waves all around the world, including here in the U.S. Bilateral trade between China and the U.S. has doubled in five years and quadrupled in 10 years. China is now the U.S.'s third largest trading partner behind Canada and Mexico.

At one level, China's economic development shouldn't be surprising. Besides being the world's most populous country, for a long time China was also the world's largest economy. For centuries, the Chinese were the world's leaders in technology and innovation. When the Chinese leadership made a decision to open China to the world and apply market-oriented principles, China resumed its traditional role in global commerce.

However, the big question many are asking is whether the rapid economic rise of China is good or bad. This is a natural concern, because most economic change creates both benefits and costs.

On the plus side, China's expansion as a low-cost supplier has helped keep prices low and inflation moderate. Consider apparel products, a production market that China is increasingly dominating. The average price of apparel products is 8 percent lower today than five years ago. And not since the 1950s has the U.S. enjoyed such a low inflation rate over a decade-long period.

China is also generating large amounts of savings that are contributing to low interest rates both in the U.S. and worldwide. Many of the dollars China is accumulating from increased sales to the U.S. market are flowing back to our country in the form of investments. To date, a large share of these investments has gone to financial securities like Treasury bills and notes. But recently, China has become more active in investing in U.S. companies; something that experts think will accelerate.

And although much of the focus has been on Chinese products being sold in the U.S., we shouldn't forget that the reverse is also occurring. U.S. exports to China have been increasing at an annual rate of more than 20 percent for five years, and in 20 years it's expected China will be part of an Asian market with more than one billion middle income consumers.

But it is the vast flood of Chinese products to the U.S. market that is causing the most concern, because with it often comes job displacement. In North Carolina, both the apparel and furniture industries have sustained production and job losses as a result of competing Chinese-made products. Although new jobs are being created in North Carolina - and a large share of them are high paying - there's always the match-up problem of displaced workers not necessarily having the skills required by the job openings. Education and re-training have perhaps never been more important in North Carolina.

So is China destined to produce everything in the world? This is unlikely for several reasons. Many economists think the Chinese economy is in danger of over-heating, much like a car that has been running at high speeds for a long time. Inflation is also an issue in China, and recent trends in the Chinese stock market have been negative.

Last, it's simply not rational for China to produce everything. Prosperity for countries, just like for individuals, is best achieved through specialization and trade.

Remember, much of what is being said about China today was said about Japan 20 years ago. Then, many claimed Japan had the economic model for the world to follow. Well, Japan has had a very lackluster economy for a decade. Will history repeat itself? You decide.

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Dr. Mike Walden is a William Neal Reynolds Professor and extension
economist in the Department of Agricultural and Resource Economics of North
Carolina State University's College of Agriculture and Life Sciences. He
teaches and writes on personal finance, economic outlook and public policy.
His You Decide column is provided every two weeks by the Department of
Communication Services. Earlier You Decide columns are available on the Web
at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm
Related audio files are at
http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html