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As the world continues to emerge from the covid-19 pandemic, the countries of China and Taiwan continue to be on the brink of a conflict that has major implications on the world economy. In recent months, the Chinese military has increased military exercises in Taiwanese territory, and the people of Taiwan have been bracing for a Chinese invasion that may take place as soon as 2027. Economists in the United States are becoming tense about the impending invasion. One may ask, “why would it matter if China invaded a small island nation that they have been claiming ownership of for decades?” The answer is very simple: A very large percentage of U.S. imports come from China, and a potential Chinese invasion of a U.S.-backed country could wreak havoc on the United States economy.
This op-ed will analyze thus havoc through the lens of comparative advantage, the idea that firms can outsource production to countries that can produce their goods the cheapest and most effectively.
Companies in the United States began to outsource their production in the 1960s and 1970s in response to stricter labor laws being enacted across the country. Firms began to realize they could outsource their production to other countries and produce their goods much more cheaply and efficiently than here at home. China, with its strong business ecosystem, low regulatory compliance, and competitive currency rates, soon became a hub for industrial manufacturing. By 2021, China was responsible for $506.4 billion in U.S. imports, nearly 20% of all foreign goods that enter the United States.
These outsourcing policies from the United States and other countries have been very good for Chinese economic growth. According to data compiled from the World Bank, since China began opening its economy in 1978, its GDP growth has averaged over 9 percent a year and over 800 million people (almost three times the population of the United States) have been lifted out of poverty, a truly staggering statistic. China went from a poor, agricultural-based country to a major economic power in less than 45 years. This shows that manufacturing capabilities can help strengthen a nation’s economy, while also improving the quality of life for its citizens. Since China has the capabilities to produce goods cheaper than we can here in the United States, this also benefits consumers in the United States by allowing us to pay less for many goods.
While outsourcing policies by large companies proved to be greatly beneficial to China, countries like the United States have experienced several negative effects of these actions. In the 20th century, the United States was one of the main manufacturing countries in the world. Unfortunately, as companies moved their manufacturing elsewhere to lower costs, this put a lot of people out of work. The trade deficit we have with China was responsible for the loss of 3.7 million jobs between 2001 and 2018 according to the Economic Policy Institute. Even though we can get our goods much cheaper when produced in China, it caused massive layoffs in the workforce, making it harder for workers in the manufacturing sector to find a job. As the trade deficit with China continues to increase, we may see even more manufacturing jobs lost in the United States.
Now we must revisit our initial point of discussion, what might happen if China invaded Taiwan? If the United States responded by cutting off trade with China, the economies of both countries would be dealt a near fatal blow. The U.S. relies on China for a plethora of imported goods, but China also relies on the U.S. for nearly 18% of its export revenue. This would create widespread problems in both countries if a conflict were to break out. Over the past 45 years, the United States has grown increasingly dependent on China for imported goods – leading some people to say that China “owns the United States.” A potential solution to this problem would be to take our manufacturing out of China and bring it back to the United States or transfer it to a country we have better relations with. While this may prove fatal to the Chinese economy, it would put an end to the 45 years of dependance that the United States has had with China. Doing this would increase U.S. labor production and dramatically lower shipping costs, as goods produced here at home would no longer have to be shipped across the Pacific Ocean. Unfortunately, this would be a very lengthy process and would take years to accomplish. With a potential conflict brewing between China and Taiwan, we must do our best to maintain peace in the Far East and hope for the best.
Ransom Van Asche, of Siloam Springs, is a student at the University of Central Arkansas. The opinions expressed are those of the author.
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