A Dynamic Theory of China-U.S. Trade: Making Sense of the Imbalances

18 Pages Posted: 1 Aug 2005

See all articles by Amar Bhide

Amar Bhide

Tufts University - The Fletcher School of Law and Diplomacy

Edmund S. Phelps

Center on Capitalism and Society, Columbia University

Date Written: July 16, 2005

Abstract

China's trade surplus with the U.S. is now more than a quarter of the U.S. trade deficit and, with China growing faster than the U.S., raises questions about its future course. Some media commentators term the chronic trade surplus mercantilist but offer no persuasive motive for it. Academics taking the classical static view regard the trade surpluses as a policy error. We offer a rudimentary model in which trade surplus in the early years is central for an optimal growth trajectory. The novelty derives from two features of underdevelopment shaping trade between backward economies like China and advanced economies like the U.S. First, the initial comparative disadvantages in China are an artifact of the uneven technical advances made by the U.S., so China may be able to erase those disadvantages through technological transfers bought with surpluses of exports over imports in goods and services. Reserves may be accumulated to pay for large lumps of know-how. Second, the diffusion of new products requires learning, which takes time, so the initial dearth of familiarity in China with a range of U.S. consumer goods operates as a drag on import demand for them, which may tip trade balances into surplus.

Keywords: Trade, development, technology transfer, innovation, learning, entrepreneurship

JEL Classification: O00, F10, E00

Suggested Citation

Bhide, Amar and Phelps, Edmund S., A Dynamic Theory of China-U.S. Trade: Making Sense of the Imbalances (July 16, 2005). Available at SSRN: https://ssrn.com/abstract=763284 or http://dx.doi.org/10.2139/ssrn.763284

Amar Bhide (Contact Author)

Tufts University - The Fletcher School of Law and Diplomacy ( email )

Cabot 505
160 Packard Avenue
Medford, MA 02155
United States
617-229-5050 (Phone)

HOME PAGE: http://www.bhide.net

Edmund S. Phelps

Center on Capitalism and Society, Columbia University ( email )

420 W. 118th Street
New York, NY 10027
United States
212-854-2060 (Phone)
212-854-8059 (Fax)

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