Time to look beyond numbers in China-US trade gap
Updated: 2007-09-13 09:17
Awidening trade imbalance between China and the United States has led to calls for action from Washington to Wall Street, but before the US plunges into a trade war with China, its business and political leaders should look beyond the trade deficit numbers.
The US-China trade deficit exceeded US$232.5 billion in fiscal 2006, according to US government figures. This represents a real economic imbalance, but the fact is that neither Chinese companies nor the Chinese government are primarily responsible.
Foreign companies drive the majority of China's exports, while many of China's domestic markets are relatively open to foreign products and brands. So the trade deficit reflects the complicated reality of globalization.
It also reflects the decisions of many non-Chinese companies, which on balance are made to benefit those companies and their customers. Consider this: Nearly 60 percent of all China's exports are driven by non-Chinese companies seeking to take advantage of the country's low-cost manufacturing and state-of-the art infrastructure.
Consumers in the US buy these products every day at Wal-Mart, Costco, Circuit City, Macy's, and other leading retailers. Many of these products display Western brand names, with Western designs and quality standards, but they are made in China.
Indeed, to keep the sourcing stream flowing, US and other international companies are investing US$1 billion a week to further expand their China operations.
By contrast, China has yet to produce a large number of purely Chinese-owned export powerhouses. This is quite different from South Korea or Japan, where local companies dominate the export landscape. In China, foreign companies drive the export game.
How about China's own market? Is China importing much from abroad? While it may not be importing enough to erase the trade deficit, China is buying a lot more from the US than it did just a short while ago, and it is likely to buy significantly more in the future as its booming economy grows.
Since China joined the World Trade Organization (WTO) in 2001, for instance, US exports to China have increased by 190 percent, making it America's fourth-largest export market, according to the Office of the US Trade Representative (and if US exports to Hong Kong are included, then China is America's third-largest export market).
The rate of increase in US sales to China has been 12 times higher than the growth of American exports to other countries during the same period, according to the US Commerce Department.
Indeed, Chinese consumers like foreign brands. And as incomes continue to rise, more Chinese consumers will seek foreign-made goods. US and other non-domestic brands already dominate many sectors in China, including cars, mobile phones, computer printers, high-end televisions, commercial aircraft, and virtually all high-end medical equipment.
The reasons why US and other foreign products do so well in China are many.
One of the most important is that the Chinese market is generally quite open to their products, far more than the Japanese and South Korean markets historically have been. Foreign brands play a large role in the daily lives of most Chinese people.
The main exceptions at this time are in the service sectors, such as financial, communications, media, and entertainment. This is an area where US trade negotiators should legitimately focus their attention, and where an opening of Chinese markets would benefit the US economy.
Another promising area is travel. Chinese consumers are eager to visit the US and to spend money there. American policy should evolve to better capture this opportunity.
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