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In: Economics

Which trade theory do you think best explain trade flows between the United States and China?...

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?

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Answer:- Theory of comparative advantage can be the theory which is being governed by the trade between the United States and China. As per this theory, a country should try to specialize in the production of those products which can be produced efficiently while it can buy those products which cannot be produced with the similar level of efficiency. Apart from this, the theory also states that an open economy simulates the economic development which can result in dynamic gains from trade.

If we look at the trade relationship between the USA and China, the private organization of the USA manufacturers a lot of products in China mainly due to low labor cost and cost of production, on the other hand, the products which can be produced efficiently in the USA are being produced in the home country itself. China being low wage country, the products produced are low in price as against high wage country as the USA.

Answer:- Having a trade surplus of more than $500 billion and foreign exchange reserve more than $1.5 trillion, a lot of criticism is made against China to follow the neo-mercantilist policy. For many years, the exports of China is increasing rapidly I comparison to its imports and many economists believe that the imports to China are being controlled by the country with the help of substitution policy. On the other hand, some believe that the cheap currency of China has also resulted in these outcomes which results in lower export prices.

Rahul Sunny answered 2 years ago
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