Question

Which trade theory do you think best explain trade flows between the United States and China? Why? Do you think that China is pursuing an economic policy that can be characterized as neo-mercantilist?

Answer 1

We think that Chinas and us trade flows can be best explained by comparative advantage theory. China exports labour intensive commodities at lower prices while as usa exports to China mainly capital intensive commodities. One can argue that USA imports from china include mainly capital intensive products like electronics. But that is not the case. China electronic exports are mainly due to lower costs of production in China due to lower wages. Also when we move away from two factor model and include rawmaterials etc it becomes clear that China exports are based on comparative advantage theory. Further all electronic goods are not capital intensive. Their packaging etc need cheap labour. Even us capital intensive industries have also shifted to china to take advantage of lower costs there..No chins is not persuing neo mercantalist policy. This is due to the fact that during last few years Chinese fdi in usa has increased substantially. Neither does China restrict imports from USA. Infact it imports electronic chips etc from USA and then exports computers, laptops etc