Four game-changing facts about U.S.-China trade

Don't just focus on the trade deficit - Here are the numbers that really matter.

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For many U.S. policymakers, a discussion of trade with China often begins—and ends—with America’s trade deficit with China.

According to a new U.S. International Trade Commission (USITC) report, America’s merchandise deficit with China for 2013 was just under $324 billion—virtually unchanged from 2012—the largest deficit with any U.S. trading partner.

While some may look to this figure as a proxy for the state of American global competitiveness, it’s a highly imperfect—if not misleading —measure.

For one thing, trade deficits tend to go down when the economy is down—because consumers are not buying. Like the overall U.S. trade deficit, the goods deficit with China was generally much lower in years like 2009, when the U.S. economy was particularly weak.

“China is no longer—if it ever was—simply the low-cost competitor that’s often still featured in our trade rhetoric.”
Standard trade deficit measures also fail to account for significant “third country content” in Chinese exports. Products that must be classified as 100 percent Chinese for trade data purposes almost always include very significant levels of parts and components manufactured in other countries, often including the United States. Newer “value-added” measures show that third-country content accounts for as much as a quarter of the reported deficit with China.

Additionally, a single-minded focus on the deficit assumes that imports from China are inherently bad when, in fact, these imports can support millions of American jobs in services, retail, and manufacturing, while lowering costs and increasing choice for American consumers. American manufacturers, for example, might use Chinese-made parts that they can’t otherwise obtain in the States to support domestic production and jobs.

Perhaps most importantly, however, focusing solely on the trade deficit risks ignoring often-surprising data that can deepen the discussion of opportunities, risks, and complexities in U.S.-China trade.

Here are four facts from the new USITC report that might change conventional perceptions about U.S.-China trade:

1. In 2013, American exports to China grew more than three times faster than Chinese exports to America.

In 2013, U.S. goods exports to China grew by 10.1 percent, while China’s U.S.-bound exports grew by 3.1 percent. This robust export performance continues a strong trend in the growth of U.S. exports to China, which have increased by an average of almost 12 percent annually since 2009.

U.S. goods exports to China also totaled $114 billion in 2013—making China America’s #3 export destination, a position it took from Japan in 2007. U.S. exports were led by farm goods as well as transportation equipment (including aircraft and motor vehicles), which grew by over 43 percent compared to 2012.

2. China was the #1 destination for U.S. farm exports.

In 2013, American farmers and agriculture producers exported $25.9 billion in products to China, accounting for 18 percent of all U.S. farm exports (up from 14 percent in 2011). China is now America’s #1 farm export destination (beating out Canada, which was America’s top farm export destination in 2012). Leading U.S. farm exports to China included soybeans, cotton, wheat, and corn.

3. When it comes to services trade, America has a significant trade surplus with China.

In 2013, U.S. private services exports to China (including education, travel, business and technical services) were valued at over $33 billion, and the United States recorded a services trade surplus with China of over $19 billion. Since 2009, U.S. services exports to China have doubled, while America’s services trade surplus has grown annually by an average of over 18 percent. Globally, China is America’s #5 market for services exports.

4. High-tech electronics products—not cheap household goods—dominate China’s exports to the United States.

The popular perception that China’s U.S.-bound exports mostly consist of cheap clothing and household goods is increasingly inaccurate.

In 2013, 40 percent of China’s U.S.-bound exports were electronics products—valued at a total of $175 billion. Over half of China’s electronics exports to the United States consisted of portable computers, mobile phones, and other communications equipment.

So, what do these data points mean for policymakers?

First, it’s noteworthy that significant growth in American exports to China is taking place despite China’s often-considerable trade barriers, including barriers to U.S. trade and investment generally, and to U.S. farm goods and services in particular. This highlights both U.S. strength in these sectors and the growing demand in an increasingly prosperous China for competitive American goods and services.

America’s strong export performance in sectors like services and farm goods also underscores the importance to the U.S. economy of continuing to engage with China in market-opening initiatives like the multilateral Trade in Services Agreement, a bilateral investment treaty, and targeted talks on particular trade barriers.

China’s significant electronics exports to the United States, on the other hand, illustrate the importance of another kind of engagement—engagement aimed at pushing back against China’s aggressive use of unfair practices to grow its high technology sector, often at America’s expense.

China has traditionally captured relatively little of the overall value of exported electronic products—like U.S.-bound iPhones—that its factories assemble for foreign companies. As a result, China has a legitimate desire to move up in global value chains for technology products. China is increasingly doing so, however, by using highly discriminatory policies to stack the deck for its national champion companies—including forced technology transfers, unfair subsidies, discriminatory standards, and abusive antitrust enforcement.

It’s thus vital for the United States and its allies to take concerted steps to confront China’s “innovation mercantilism” by, among other things, setting new global trade norms in regional trade deals like the Trans-Pacific Partnership.

Finally, these facts illustrate one truth that should be no surprise—that China is an increasingly complicated place.

China is no longer—if it ever was—simply the low-cost competitor that’s often still featured in our trade rhetoric. It’s also a growing buyer of American products and a fierce and often unfair competitor for global innovation. Complexity abounds in a China founded on Maoist principles—that’s also creating 159 new millionaires every day.

As they develop policies to deal with the complexities of a changing China, it might help our policymakers to dive deeper into the data.

Ed Gerwin is Senior Contributing Editor to Republic 3.0 and President of TradeGuru LLC. Follow: @EdGerwin.