Terms of trade: China and USA | Report

Trends in terms of trade: USA and China 2
Executive summary
The international and global market has experienced on increase in international trade over the
last couple of decades due to increased globalization that has been propelled by technology
advancements and its fast and effective adoption worldwide. This has opened markets that were
un-reachable leading to the development of demand and supply, therefore, increasing foreign
trade between countries. Terms of trade in an international economic concept that is essential in
determining the state of the economy of a country through carrying out its business activities,
these business activities can be summed up to a county’s exports and imports.USA and China
will be the main focus in the paper from a perspective of TOT. The trends in the terms of trade
will be analyzed with the phase where the 1st phases are from 2008-2013 second phases 2013-
2018 and the final phase is the summary of 2008-2018. Additionally, the factors that are
affecting the trends in terms of trade of the USA and China will also be depicted in the paper.
Finally, the various effects on the economic welfare of China and USA by the terms of trade will
be illustrated in the paper too

Trends in terms of trade: USA and China 3
Table of Contents
Terms of trade: China and USA......................................................................................................4
Introduction......................................................................................................................................4
A clear perspective on China and USA economies.........................................................................5
Terms of trade trend the USA..........................................................................................................7
Terms of trade trend China............................................................................................................11
Factors affecting the Trend in terms of trade in the USA..............................................................14
Factors affecting the Trend in terms of trade in China..................................................................15
Effects of the terms of trade on the welfare of the USA and China..............................................16
Conclusion.....................................................................................................................................17
References......................................................................................................................................18

Trends in terms of trade: USA and China 4
Part One
Terms of trade: China and USA
Introduction
International trade between countries has grown exponentially over the last couple of decades
thanks to the increase in technological advancements and its adoption, which has propelled
globalization in the long run (Eriksen 2018). From an economics perspective, comparative
advantage is the main basis of the international trade of goods and services between countries.
There are various concepts, principles or variables that are used to monitor or analyses the
various aspects of international trade among them is the Terms of trade (TOT). Terms of trade in
an international economic concept that is essential in determining the state of the economy of a
country through carrying out its business activities, these business activities can be summed up
to a county’s exports and. Therefore, from this context, the definition of TOT can be derived to
basically mean the rate at which a country’s exports exchange for its imports (Schmitt‐Grohé and
Uribe 2018).
The prices of imports and exports in international trade naturally govern the terms of trade.
Therefore, TOT measurement requires price indices depiction of imported and exported goods
and conducting a comparison of the two. TOT would definitely increase when the exported
goods rise in prices and on the other hand TOT will decrease with the rise in imported goods.
The terms of trade of a country measure the country’s export prices in relation to its import
prices and it expressed as (index of export /index of import)x 100 (Kulish and Rees 2017).
A good example for achieving a clear understanding of the expression, if an economy is only
exporting mangoes and importing oranges, the terms of trades are basically the price of mangoes
divided by the prices of oranges, or in other words is how mangoes can be obtained for a unit of

Trends in terms of trade: USA and China 5
oranges The terms of trade have been affected by various trends over the years, this research
paper will focus on these trends through the perspective of two countries; China and USA. Trend
analysis for the last 10 years of the two countries will be illustrated backed up with factual
diagrams. This information will then be helpful in analyzing the terms of trade impact on the
welfare of the two countries
A clear perspective on China and USA economies
China and the USA are today considered to be the largest economies in the world, the USA
has maintained the title for more than half a century but experts predict that China may overtake
the USA and be that largest economy (Chowdhury 2015). Nevertheless, the USA still remains at
the top of the table with a nominal gross domestic product forecast to exceed 21 trillion dollars in
2019 which accounts for 20% of the global output which is expected to grow by 2.5% by 2020.
This is due to the fact that the US economy is featured with services sectors that are advanced
technologically and highly developed which is approximately 82% of the total output. Moreover,
most of its companies and organizations are players in the global market sectors such as
healthcare, technology, retail and financial services. China is the second-largest economy with a
nominal gross domestic product of 14 trillion dollars which is expected to grow by 6.3% by the
end of 2020. However, unlike the USA, China was once a smaller economy, it ranked 9th in
1978 when it was initiating its economic reforms that would prove fruitful decades later. China is
the manufacturing hub of the world today where the secondary sector comprises the largest share
output in the gross domestic product. more sectors such as the tertiary and communication
industry are continuing to grow due to increased modernization and technological advancements
which might propel China to be the; largest economy (FocusEconomics 2019).

Trends in terms of trade: USA and China 6
Figure 1:top five largest economies in the world
Although China and the USA are the largest economies, however, their economic systems are
entirely different. The USA has a capitalist economic system that is characterized by the freedom
of business operation. This basically means that distribution or production is corporately or
privately owned, funding of operation through profits gained and not controlled by the
government. Individual rights play a major role in capitalism implementations as a small
business, private individuals and organizations make independent choices in relation to process,
production and distribution of goods, it’s a self-regulating market. China's economic system is
socialism which is characterized by strong involvement in the government. Private ownership is
discouraged and insists on collective ownership through agencies controlled by the state or
owned whole by society. Individual rights dot not play a significant role in socialism rather the
collective gain of the society is the main priority (Ollman et al 2018). Therefore, the
indifferences in the economic systems of the two countries will definitely have a significant
effect on the terms of trade(TOT) as each system has a different point of view. Moreover, the
increased volatility in the markets over the last 10 years may depict some similarities and
differences in the TOT trends of China and USA which will be depicted in the next segment

Trends in terms of trade: USA and China 7
Part Two
Terms of trade trend the USA
In order to understand the terms of trade trend in the USA, this section will be divided into three
phases the first phase will be 2008-2013 and the second phase will be 2013-2018 and the last
phase will be the whole summary of the ten-year trend and projected forecast.
Figure 2:Terms of trade trend 2008-2013(source, the global economics .com)
The trade of terms in 2008 -2013 was at an all-time high in 2009 where it was index 98.99 and
an all-time low in 2008 where it was indexed at 91.80. The average terms of trade in the USA
averaged 95.41 within the five year period. The diagram illustrated that the US economy was not
healthy in 2008 although there was a significant rise in 2009, however, the terms of trade
continued to drop from 2009-2011. This was due to the global financial crisis of 2007-2008
which its effects were continuing to be felt by most USA trade partners (Womack, 2017). The
crisis is considered to be the harshest global crisis since the great depression of the 1930s.
However, from figure 2, it is quite notable that the index drop stalled at the end of 2011 with an

Trends in terms of trade: USA and China 8
index of 94.59. This growth continued throughout the remain years and ended with an index of
95.34 in 2013 which is a rise of 1.3%. This growth in the terms of index illustrated that the US
economy was slowly recovering from the global crisis of 2007-2008, Nevertheless, the terms of
trade for the five years illustrate a shaky economy trend which can be traced back to the financial
crisis, however, there has been a significant improvement by 3% from 2008 -2013
(Tradingeconomics, 2019).
Figure 3:Terms of Trade trend illustration of the USA from 2008-2013
The second phase of analysis of the terms of trade in the USA is 2013-2018 which is shown in
figure 4 below

Trends in terms of trade: USA and China 9
Figure 4:Terms of Trade trend illustration of the USA from 2013-2018
The trade of terms in 2013 -2018 was at an all-time high in 2016 where it was index 100.8 and
an all-time low in 2013 where it was indexed at 95.34. The average terms of trade in the USA
averaged 98.57 within the five year period. The diagram above depicts that the terms of trade of
terms in the USA increased by 5.73%, this shows that the economy in the country is favorable
and complete recovery from the Financial market crisis is seen. There was a slight drop in 2017
to 99.59 which could have been contributed by shaky politics and perceptions of reality by US
President Donald Trump who entered office in January 2017 (Rosyadi and Widodo, 2018). The
economy slightly recovered at the end of 2018 where the terms of trade increased to 99.84
although lower than the all-time high in 2016 (The Global Economy,2019).

Trends in terms of trade: USA and China 10
Figure 5: Terms of Trade trend illustration of the USA from 2013-2018
The final phase is the summary of the trend analysis of the terms of trade of the USA for the past
10 years. Figure 6 below illustrates that year 2016 was an all-time high, indexed 100.8 and
2008 to be the lowest with an index of 91.8 within the 10-year period

Trends in terms of trade: USA and China 11
Figure 6: Terms of Trade of the USA from 2008-2018
The terms of trade in the US have increased by 8.7 % and averaged an index of 96.99 within the
10-year period which illustrated that the economy has continued to improve despite that various
challenges along the way. The figure below illustrates the positive trend of the terms of trade in
the USA which is expected to grow to 106.3 in 2020(The Global Economy,2019).
Figure 7: Positive trend Terms of Trade illustration of the USA from 2013-2020
Terms of trade trend China
In order to understand the terms of trade trend in China, this section will be divided into three
phases the first phase will be 2008-2013 and the second phase will be 2013-2018 and the last
phase will be the whole summary of the ten-year trend and projected forecast.

Trends in terms of trade: USA and China 12
Figure 8: Terms of Trade of China from 2008-2018
The trade of terms in 2008 -2013 was at an all-time high in 2009 where it was index 91.1 and an
all-time low in 2011 where it was indexed at 79.05. The average terms of trade in China
averaged 82.71 within the five-year period. The diagram illustrated the economy in China was
not healthy within the five-year period, although it recovered significantly in 2009 by a 6.1%
increase to 91.1 indexes from 83.81 in 2008 from the financial crisis in 2007-2008. The 11.47%
sharp decrease in the terms of trade from 2009-2013 illustrated unfavorable conditions. These
unfavorable conditions can be traced to poor monetary lending policies that the central back
oversaw in response to the global finical crisis. The increased lending and re-lending caused the
money supply to surge by 53% and the extra cash to contributed to unmeasurable inflation that
contributed to the slow growth of the economy

Trends in terms of trade: USA and China 13
Figure 9: Terms of Trade trend illustration of China from 2008-2015
The second phase of analysis of the terms of trade of China is 2013-2018 which is shown in
figure 10 below
Figure10: Terms of trade illustration of China from 2013-2018

Trends in terms of trade: USA and China 14
The trade of terms in 2013 -2018 was at an all-time high in 2015 where it was index 92.53 and
an all-time low in 2013 where it was indexed at 80.65. The The average terms of trade in China
averaged 87.22 within the five-year period. The diagram above depicts that the terms of trade of
terms in the china increased by 14.73% from 2013-2015 this shows that the economy in the
country was favorable at the time and was recovering from the Financial market crisis and the
poor monetary policies. However, with an index of 92.33 2016 was a tipping point for the terms
of trade decrease for the next two years. This was mostly due to the coming general election that
increased political uncertainty but the poor monetary policies overseen by the bank were
catching up with the economy slowly increasing inflation (Engel, 2018)
Figure
11: Terms of trade illustration of China from 2013-2018
The terms of trade in China stalled with a 0.97 % increase and averaged an index of 84.96 within
the 10-year period which illustrated that the economy has been stalling and has been suffering
from the aftermath of the financial crisis coupled with poor monetary policies. The figure below
illustrates a stalling trend of the terms of trade in China which also illustrates the uncertainty in
2020 (Tradingeconomics,2019).

Trends in terms of trade: USA and China 15
Figure12: Stalling trend illustration of China’s Terms of the trade from 2013-2018
Part Three
Factors affecting the Trend in terms of trade in the USA
Technology advancements
Over the last couple of decades, the USA has experienced an increase in technological
advancement and adoption. In fact, it is arguable that the USA is among the economies that are
technologically advanced. This has been achieved through increased funding in research and
innovation of different industry sectors with the full support of the government. This has resulted
in the improvement of the production process and cost-cutting measures that lead to providing
quality goods are at the affordable process that is within the profit margin. Such goods are highly
sough-after which increases their exports to a foreign nation that plays a critical in improving the
trend in trading terms of the country in the long run (Gulley, Nassar, and 2018).
Changes in taste and preferences.

Trends in terms of trade: USA and China 16
The changes in taste and preferences of goods have adverse effects on the trend in terms of trade
with another country. For example, when the USA’s change and preferences of vehicles shifts
from China to its own, it means that the US would export fewer vehicles to China and its demand
for Chinese vehicles would fall. The terms f trade would, therefore, improve, however, if the
taste and preferences of Chinese vehicles would increase its demand would also increase which
would have a negative effect on the terms of trade in the USA
Tariffs
USA tariffs imposition on import goods is another factor that creates favorable conditions that
are essential in improving the terms of trade. the prices of imported goods are increased
exponentially thereby improving the position of the country. However, the improved portion
only remains relevant as long a the tariffs imposed does not; lead to other country or countries
retaliating. This would cause a disruption in the terms of trade creating unfavorable conditions
for both parties which would result in slow economic growth in the long run (Feenstra, and Xu,
2019).
Factors affecting the Trend in terms of trade in China
Currency devaluation
China has been devaluing its currency from time to time in order to balance the terms of trade
and regain its economic growth in the long run. When trading with another country such as the
USA, the price of domestic imports are increased while the foreign price of exports is reduced.
The position of China is increased as it has favorable terms of trade. which affects the trend and
plays a major role in the recovery of the economy (Chow, 2017)
Technology advancements and changes

Trends in terms of trade: USA and China 17
Technological advancement and changes adversely affect the trend in terms of trade in China,
Moreover technology incorporation into production process has increased over the last decade
This has been achieved through increased funding in research and innovation of different
industry sectors with the full support of the government moreover China is also known for its
reverse engineering and improving stolen technologies which have also increased its position in
the terms of trade (Gulley, Nassar, and Xun, 2018). This has resulted in the provision of quality
goods at affordable prices that are within the profit margin. Such goods are highly sough-after
which increases their exports to a foreign nation that plays a critical in improving the trend in
trading terms of the country in the long run.
Economic growth
The economic growth of a country has an adverse effect on the trends in terms of trade and its
position in the long run. A good is example is the current status of China as a production and
manufacturing hub or a home abundant labor country for electronic materials such as
smartphones. China is able to provide cheap labor than its competitors in other countries such as
France and the USA. Therefore, this makes the price of their exports cheap and affordable and of
a high quality due to technology advancements. This creates favorable terms of trade with the
countries that it trades with (Liu, and Dunford, 2016).
Part Four
Effects of the terms of trade on the welfare of the USA and China
The quality of standards of living in a country is essential to the welfare of the economy which is
influenced by the state of terms of trade. Terms of trade that are favorable to both china and the
USA have created job opportunities that go a long way in improving and maintaining the
standards of living. Moreover, the economic state of the countries also improves and becomes

Trends in terms of trade: USA and China 18
more stable which reflects an increase in the GDP of the countries. However, the terms of trade
can also have a negative effect on the welfare of an economy. In the case where a country
chooses to create favorable conditions at the expense of another party a retaliation might occur
which may damage the welfare of even both countries. China and the USA have been in a trade
war for months now due to differences in terms of trade where one party wants to benefit more
than the other (Rosyadi and Widodo, 2018). Tariffs have been imposed on various sectors in
retaliation which has caused a reduction in the house disposable income to those affected by the
retaliation leading to stalling the economic growth of the two countries in the long run
(Chowdhury 2015).
Conclusion
Trade in the international market has increased over the last couple of decades due to increased
globalization that has been propelled by technology advancements and its fast and effective
adoption worldwide. This has opened markets that were un-reachable leading to the development
of demand and supply, therefore, increasing foreign trade between countries. Terms of trade in
an international economic concept that is essential in determining the state of the economy of a
country through carrying out its business activities, these business activities can be summed up
to a county’s exports and imports.USA and China have been the main focus in the paper from a
perspective of TOT. The trends in the terms of trade have been analyzed with the phase where
the 1st phases are from 2008-2013 second phases 2013-2018 and the final phase is the summary
of 2008-2018.the factors that re affecting the trends in the terms of trade of the USA and China
have also been depicted in the paper. Finally, the various effects on the economic welfare of
China and USA by the terms of trade have also been illustrated

Trends in terms of trade: USA and China 19
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Chowdhury, A., 2015. Terms of trade shocks and private savings in the developing
countries. Journal of Comparative Economics, 43(4), pp.1122-1134.
Engel, J., 2018. Regulation, financialization and fraud in Chinese commodity markets after the
Global Financial Crisis. Regional Studies, pp.1-10.
Eriksen, T.H., 2018. Globalization. In Handbook of Political Anthropology. Edward Elgar
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Feenstra, R.C., Ma, H. and Xu, Y., 2019. Us exports and employment. Journal of International
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Geng, Y., Tian, X., Sarkis, J. and Ulgiati, S., 2017. China-USA trade: indicators for equitable
and environmentally balanced resource exchange. Ecological Economics, 132, pp.245-254.
Gulley, A.L., Nassar, N.T. and Xun, S., 2018. China, the United States, and competition for
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Trends in terms of trade: USA and China 20
Kulish, M. and Rees, D.M., 2017. Unprecedented changes in the terms of trade. Journal of
International Economics, 108, pp.351-367.
Liu, W. and Dunford, M., 2016. Inclusive globalization: Unpacking China's belt and road
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Ollman, B., Schweickart, D., Ticktin, H. and Lawler, J., 2016. Market Socialism: The Debate
Among Socialist. Routledge.
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https://www.theglobaleconomy.com/USA/Terms_of_trade
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Trends in terms of trade: USA and China 21
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