The U.S. trade deficit with China, which topped $315 billion in 2012, is often interpreted as a sign of impending doom for the U.S. economy, but Marc Ross (OneMBA ’08) advises that the numbers aren’t as daunting as many think.
Ross, U.S.-China Business Council (USCBC) director of communications and publications, laid out three reasons why during his keynote address at the Duke-UNC China Leadership Summit April 7.
There’s always been a trade deficit.
Before America was a nation and revolutionaries dumped tea imported from China into the Boston Harbor in the 1700s, an American trade deficit with China existed. While Americans had developed a taste for Chinese products early on, Chinese were much less interested in U.S. goods. Silver, an integral part of the Chinese economy, was used to facilitate more than 70 percent of early purchases. U.S. products, such as furs, sandalwood and cotton, made up a much smaller percentage of transactions and the numbers were miniscule compared to the Chinese goods imported.
“If you look at where we started and where we are now, not much has changed,” said Ross. “Americans have been trying to sell stuff in China forever, and we’ve had a trade deficit just as long.”
The trade deficit doesn’t tell the whole story.
Today China is the United States’ second largest trading partner and third largest export market, but current trade measurements, namely surpluses and deficits, might not the best way to measure the countries’ actual commercial relationship. For example, when product components are produced in the United States, assembled in China and shipped to Belgium, this process only registers as trade between China and Belgium. This measure gives China, which is essentially an assembly economy engaged in process trade, a larger advantage in trade numbers. The Organisation for Economic Co-operation and Development is developing a more sophisticated trade measurement system and recently released a report estimating that the actual U.S.-China trade deficit is about 25 percent lower than current reporting methods suggest.
In addition, the rising U.S.-China trade deficit is often misinterpreted as showing that the United States is importing a drastically higher number of products. In reality, the United States is just importing more products from one country.
“The bilateral deficit gets a lot of attention, especially in the U.S., but I would contend that most of this has to do with the consolidation of Asian supply chains into China,” Ross said. “We’ve always imported products like televisions and electronics from that region. Nothing’s really changed. The trade deficit is just much more concentrated in one country.”
Chinese investment in the United States is growing faster than ever.
State and local developments are important indicators of how much the U.S.-China commercial relationship is thriving – and changing. China is no longer just shipping products to the United States; it also is sending investments. Governors and local officials are traveling to China in record numbers to seek investors and trade partnerships. Ross said Chinese investment in the United States last year was a record-breaking $6.5 billion. However, in order to continue the development of these positive trends, both governments need to support open investment for foreign companies.
“Investment issues will be a key factor for the future of the bilateral relationship in coming years,” said Ross. “Chinese companies want to invest more in the U.S., but they’re encountering political obstacles that politicians are using either for protectionist reasons or to challenge China from a national security standpoint. China will need to reduce its own investment barriers as well. China currently maintains foreign ownership restrictions in nearly 100 manufacturing and services sector categories.”
Despite the obstacles, Ross has an optimistic outlook for the next 40 years of U.S.-China relations. “In my job I get exposed to a lot of Chinese economic data. By some reports China is the best thing in the world, and some say it’s the worst thing in the world,” he said. “It’s probably somewhere in the middle. Just look at the level of engagement from the White House, American business leadership and average U.S. citizens. There are a lot of challenges, but there also is a lot of energy around this relationship and the intense level of engagement point to a lot of potential.”