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.There have also been large swings in competitivenessdue to relative productivity movements and exchange rate swings.A recenttheme that has emerged is unfair trade competition.Most usually China is28 Untangling the US deficitthe target as currency manipulator and for not respecting intellectualproperty rights.However, American car producers in 2006 charged Japanwith currency manipulation due to a fall in the yen against the US dollarwhich they blamed on market intervention by the Bank of Japan toencourage the exports of Japanese cars (Gapper, 2006).4Consider, first, the changes in the structure of trade.Rather than look atthe trade imbalance in terms of categories of goods, as we have above, it isinstructive to look at the deficit by country or region.The data are given inTable 2.1.It is apparent that the geographical pattern of US trade, espec-ially for imports, has changed significantly.US trade with the industrialcountries overall has fallen, with the share of imports at 53 per cent (downfrom 74 per cent) and that of exports falling from 66 to 58 per cent over theperiod 1980 2005.The share of exports to (non-China and non-Japan)Asia increased to 16 per cent, and the share of trade with Latin America(excluding Mexico) contracted, while both exports to and imports fromMexico have expanded.However, the most dramatic change is the share ofimports from China, which increased from less than 1 to 16 per cent overthe period.Table 2.1 Percentage trade shares by country or region, 1980 2005Exports Imports Total trade weights1980 2005 Change 1980 2005 Change 1980 2005 ChangeEurope 26.6 18.5 8.1 21.4 18.8 2.6 24.6 20.7 3.9ex-UK1Canada 21.7 25.9 4.2 25.2 18.9 6.3 18.8 16.3 2.6Japan 11.2 7.2 4.1 20.6 10.8 9.8 16.7 10.0 6.7Mexico 8.1 15.1 7.1 4.3 11.3 7.0 4.4 9.8 5.4China 2.1 4.7 2.7 0.6 16.3 15.7 1.3 13.4 12.1UK 6.3 4.7 1.6 5.2 3.4 1.9 7.2 4.8 2.4Other Asia2 11.7 15.7 4.1 16.1 15.3 0.8 14.4 17.3 2.9Other Latin 7.8 4.1 3.8 4.2 2.7 1.5 6.1 3.9 2.2America3Australia 0.8 1.9 1.0 1.7 0.6 1.1 1.7 1.2 0.5Other 3.7 2.2 1.6 0.7 1.9 1.2 4.8 2.6 2.1Notes:1.Europe ex-UK defined as Euro area, Switzerland, Sweden.2.Other Asia includes Taiwan, Korea, Singapore, Hong Kong, Malaysia, Thailand,Philipines, Indonesia, India.3.Other Latin America includes Brazil, Argentina, Venezula, Chile and Colombia.Source: Federal Reserve.The trade perspective 29Another feature of the US trade experience over recent decades has beenthe increase in the variety of goods imported (Broda and Weinstein, 2005).Table 2.2, based on those authors work, shows that the variety of goodsentering the United States increased by more than threefold between 1972and 2001.Notably, China is the country the export base of which hasdiversified most over recent decades.In the 1980s and early 1990s, China sexports were concentrated mainly in clothing, footwear, toys, and otherlight manufacturing products.Since then, its shares of world exports haverisen in nearly all categories and have grown especially rapidly in officemachinery and telecommunications products (including electronics), aswell as furniture, travel goods, and industrial supplies.More recently, Chinahas made substantial gains in more hi-tech export categories, includingautomated data processing equipment.Electronic goods now account foras much as 25 per cent of China s exports.Another example of thisdiversification is the number of broad product lines in which China s shareof US imports exceeds 10 per cent, which has risen from 5 in 1990 to 16 in2002 (Prasad and Rumbaugh, 2003).Capital good diversification has been a feature of China s recent exportdrive.The standard international measure for product and varietydiversification is the United Nation s Standard International TradeClassification (SITC).In the case of China, the growth in variety wasespecially great for capital goods with the number of SITC categoriescontributed by China having grown by more than 250 per cent between1980 and 2003.In 1980, China provided only 46 categories under thecapital goods heading, metalworking machine tools being the biggest innominal dollar terms ($18 million).By 2003, China supplied 125 goods outof 136 four-digit categories in capital goods, with $9 billion worth ofTable 2.2 Variety in US imports, 1972 2001Number of goods Total number of varieties3All 1972 goods1 7 731 74 667All 1988 goods1 12 822 173 937All 1990 goods2 14 572 182 375All 2001 goods2 16 390 259 215Notes:1.Based on the seven-digit classifications of the Tariff Schedule of the United StatesAnnotated (TSUSA) system.2.Based on the ten-digit classifications of the Harmonized Tariff Schedule (HTS) system.3.According to good country pairs.Source: Broda and Weinstein (2005).30 Untangling the US deficit peripheral automatic data processing units as the largest and $6 billion ofoffice-machine accessories as the second largest category (Mann and Pluck,2005, p.11).CHINA S EXCHANGE RATE SYSTEMChina s exchange rate policy is often portrayed as the prime culprit forAmericans apparently almost insatiable appetite for Chinese goods.Byfirst pegging the renminbi to the dollar and then limiting the movement ofit vis--vis the US dollar under the basket float, the Chinese authorities aresaid to have made Chinese goods artificially cheap and have hampered thetendency of a depreciating dollar to limit US imports of Chinese products.If Americans are purchasing more foreign goods, and more dollar assetsare passing into overseas hands, the growth of foreign-held dollar assetsshould decrease the dollar s value relative to other currencies.Eventually,foreign goods would become more expensive for Americans and the tradebalance would become more equal.However, if other countries follow thedownward path of the dollar to keep their exchange rate low to encourageexport-led growth, the US dollar will be too high and US exports will con-tinue to languish and US imports will continue to grow
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