Letter from Washington
A Balanced Approach to Trade with China
by John Frisbie
President of the US-China Business Council
The fixation on China's currency as the root evil of US-China trade relations is a mistake and threatens to distract our political leaders from making real progress with Beijing that could benefit US business, consumers, and workers. The Bush administration recognizes this fact, though some members of the US Congress remain unconvinced.
We need a balanced approach to trade with China. The attention US lawmakers have paid to China's currency policy is understandable, but it is also dangerously narrow. Yes, market forces should set currency rates, and we need to encourage the Chinese along this path. But this won't make much of a dent in the bilateral trade balance or bring back jobs.
It is well known that the United States had a $160 billion trade deficit with China in 2004, the largest we had with any single country (full year 2005 figures were not available as CBR went to press). Less attention is paid to the fact that we had a $491 billion trade deficit with the rest of the world in 2004. Clearly, China is not the only source of America's trade imbalance.
Between 1994 and 2004, our trade deficit with China increased by $133 billion. But our trade deficit with the rest of the world rose by $369 billion during that time—nearly three times as much. No, it's not just oil, either. Our trade deficit with Canada and Mexico rose $100 billion; with European Union countries, $92 billion; with OPEC countries, $59 billion; and with the rest of the world, $118 billion. Something more fundamental than Chinese currency policy is driving up our trade deficit across the board.
It is also misleading to consider our trade position with China without looking at Asia as a whole. Over the past decade, Asian countries have been moving their manufacturing capacity to China, in essence shifting our trade deficit with them over to China. As China's share of our total trade deficit increased in the past decade from 20 to 25 percent, our deficit with other major Asian exporters plummeted from 63 percent to 20 percent of the total.
Knowing that our trade deficit spans the globe does not help an American worker whose factory has closed. While we must develop policies to meet the challenges faced by these workers, we must also take care not to undercut the substantial economy-wide benefits of trade. Lower-cost imports mean lower prices for US consumers. Gary Hufbauer of the Institute for International Economics estimated that lower-cost imports from the China effect translate into more than $500 in annual savings for every American—that's $2,000 for a family of four. Lower prices also translate into lower interest rates, which helps homeowners and small businesses.
In short, while market-influenced movement in China's exchange rate is important, Americans should recognize that this will not solve the trade deficit problem. Even if the renminbi strengthened by 40 percent, as some critics urge, we would just import more from South Korea or Malaysia or Mexico—and pay more for the goods we buy. Higher prices hurt all Americans.
And while US lawmakers focus their attention on imports, they often lose sight of the fact that our exports to China have grown dramatically since China's entry into the World Trade Organization (WTO) in 2001. China was our eleventh-largest export market the year before WTO entry. In 2004, it became our fourth-largest export market. By mid-2005, China and Hong Kong together trailed only Canada and Mexico, our two free-trade area partners and neighbors, as a market for US products.
While the benefits of trade with China are therefore significant, we clearly have trade issues with China that need to be addressed. American businesses want a level playing field and are willing to work hard and speak out to get one. We must look at whether vestiges of the old state-owned economy give China an unfair competitive advantage. For example, we must push for broad financial sector reforms—not just currency policy reforms—that would eliminate unfair credit advantages for Chinese companies. President George W. Bush and Treasury Secretary John Snow raised this issue on their recent visits to China.
Bush also raised the important issues of intellectual property protection and greater market access in China. China has a decent record of adopting WTO standards—witness our export growth as their barriers come down—but it must implement and enforce all of its WTO commitments in full and on time. Advances on these issues will expand US exports and benefit American workers and farmers.
China is not the source of all of our trade problems, but it is the source of many of our opportunities. By focusing squarely on broader financial sector reforms, intellectual property, and the array of market access concerns, the US government and the business community can move us forward in resolving these issues, bringing real benefit to the US economy.
Top of Page
Table of Contents
