While Washington negotiates with Chinese leaders, local governments and businesses are making deals in China.
by Ben Baden
When Chinese Vice President Xi Jinping visited the United States in February, he made a stop at Rick and Martha Kimberley’s farm just outside of Des Moines in Maxwell, Iowa. Their son, Grant Kimberley, who is director of market development at the Iowa Soybean Association, told Xi that Iowa could be a reliable trading partner, and Kimberley said Xi emphasized the importance of building lasting relationships between the United States and China. On that same trip, China signed a deal to purchase $4.3 billion worth of soybeans from the United States.
Xi had been to Iowa once before—27 years ago as a low-ranking government official from Hebei province—after the state of Iowa and Hebei had established their sister-state relationship. Now, Xi is expected to become president sometime in the next year, and Kimberley says the soybean business with China is booming because Iowa has become a trusted partner for the Chinese.
“China is a huge market for us,” he says. Iowa is the largest soybean producing state in the United States. The state’s efforts account for approximately 15 percent of all soybeans grown. About 55 percent of all soybeans grown in the United Sates are exported, and in 2011 roughly 60 percent of US soybean exports—or about a quarter of all soybeans grown in the United States—went to China, according to the Iowa Soybean Association. Soybeans are the United States’ single largest export to China. In 2011, US companies shipped $10.5 billion worth to China, and experts expect that number to keep growing.
In 1982, the American Soybean Association opened an office in Beijing. Back then, China was a net exporter of soybeans. But in the 1990s, because of its growing population and lack of arable land, China was forced to start importing some agricultural products like soybeans. Soybeans are used in a range of products, including animal feed, and as China’s middle class grows so does its appetite for meat.
DURING RECESSION, EXPORTS SHIFT TO CHINA
Iowa is not alone in its exporting success. While the Obama administration and Congress wrestle with China on overarching issues such as currency manipulation, intellectual property rights protection, and what the United States sees as other unfair trade practices, states and cities across the country are ramping up and succeeding in their efforts to export to China. Even though the US trade deficit with China remains wide, US exports to China have exploded over the last decade.
Between 2000 and 2011, total US exports of goods to China rose 542 percent, from $16.2 billion to $103.9 billion, according to the US-China Business Council’s 2011 state export report. Total exports to the rest of the world increased only 80 percent during this period. The growth in exports to China by value exceeds every other market except Canada. “In terms of growth rates, exports to China have blown away all of the other major markets,” says Daniel Anthony, research director at the Trade Partnership, a consulting firm in Washington, DC. “Export growth rates to China since 2000 more than triple those of any other country among the top 15 destinations for US exports.”
With slow growth at home, US exports to emerging economies like China help drive the US economic recovery. In fact, the growth of US exports of goods and services in 2010 was the fastest single-year growth of US exports on an inflation-adjusted basis since 1997, according to Emilia Istrate, senior research analyst at the Brookings Institution in Washington, DC. Much of that growth can be attributed to China and other emerging economies. For instance, Brookings data showed the value of all US exports of goods and services grew by 11 percent on an inflation-adjusted basis between 2009 and 2010. But over the same period, US exports to China increased by 28 percent on an inflation-adjusted basis. As a result, the share of US exports to China has increased from 4.6 percent of US exports of goods and services in 2008 to 6.2 percent in 2010. In contrast, the share of US exports going to the European Union dropped from 26.6 percent in 2008 to 23.6 percent in 2010.
“US exports to China continue to grow throughout the recession and the recovery,” Istrate says. “Our research has shown that the Great Recession accelerated the shift of exports to emerging markets like China. There has been a growing underlying trend of US companies selling goods and services into developing countries. The Great Recession just gave it a push.”
SELLING TO CHINA’S MIDDLE CLASS
Aside from concerns about a short-term slowdown in the Chinese economy, Istrate says the key for long-term growth in the future is how quickly and successfully the Chinese government moves to a more consumption-based economy, and away from one that is reliant on fixed-asset investment and exports. “The prize in everyone’s eyes is the large and growing Chinese middle class,” Istrate says.
President Obama’s National Export Initiative, announced in January 2010, aims to double US exports by 2014—a target that requires at least 15 percent average annual growth per year for five years. China is among the countries for which US exports have exceeded the global annual average growth rate of 18 percent in the National Export Initiative’s first two years. “The cost-benefit equation keeps shifting in favor of American businesses—meaning that the cost, the difficulty, and the challenges of [selling] to China continue to diminish, more slowly than we want sometimes—but it’s definitely improving all the time,” says Frank Lavin, founder and global CEO of Export Now, an online service that allows US companies to sell their products online in China.
Exports of goods aren’t the only bright spot. American companies provide a lot of services that cannot be shipped over in a box. US exports of services in areas such as tourism, law, finance, engineering, and architecture to China have nearly quadrupled since 2001. “All of those types of research and professional services, American firms are now doing for the Chinese,” Anthony says. In 2010, the latest number available, American companies exported $21 billion worth of services to China.
Nearly one-third of all US exports are services. The share of services exports is lower in China because many services sectors are closed to US companies in China. But there are simple policies that could be implemented to change that, such as easing visa restrictions for Chinese travelers to the United States, Istrate says. Travel and tourism is the largest export industry in the United States, according to the US Travel Association. Chinese tourists are helping drive that growth. The average Chinese tourist spends $6,243 during a trip in the United States compared to an average of only $4,000 for all overseas travelers.
“The prize in everyone’s eyes is the large and growing middle class.” –Emilia Istrate, senior research analyst at the Brookings Institution
Whether the goals laid out in the National Export Initiative are met may depend on the success state and local governments have. “The federal government has an important role to play, but ultimately the states and local organizations know their companies better,” Istrate says. “The National Export Initiative has to become more localized. It has to trickle down to reach the US companies.” Currently, only about 1 percent of US companies export their goods or services.
That’s why Brookings launched its Metropolitan Export Initiative to help cities develop an export strategy. Four pilot metro areas were chosen: Portland, Oregon; Syracuse, New York; Los Angeles; and Minneapolis-Saint Paul. “For too long, the discussion around exports has been focused on the macroeconomic policies,” Istrate says. “It’s also about services that are provided like what type of trade financing is provided to help sell abroad to China and other countries.”
Major metropolitan areas and states across the country are organizing trade missions to China to showcase their products and services. Half the battle, experts say, is building relationships and contacts with Chinese officials and companies. Because China’s system of governance is so decentralized, making connections with local officials is crucial. “Most of the cities in China act like small governments in the sense that you do need a mayor or a provincial head with you when you do business in China,” says Bill Cronin, vice president at Invest Atlanta, the economic development agency in Atlanta.
In March, Invest Atlanta helped organize a trade delegation led by Atlanta Mayor Kasim Reed that made stops in Shanghai; Nanjing, Jiangsu; Hangzhou, Zhejiang; and Shenzhen, Guangdong. Companies that went on the trip already project $125 million in expected sales resulting from meetings and discussions they had while in China.
The majority of the Atlanta-based companies that made the trip to China are in the services sector. Global design firm tvsdeisgn traveled with the Atlanta delegation. It has already helped design two convention centers, one in Nanjing and one in Beijing, and it’s currently bidding on another project near the completed Nanjing Conference and Exhibition Center. “What we’ve learned is that even with the competition, it’s about the relationships you’ve built,” says Roger Neuenschwander, president of tvsdesign. “It’s guanxi, which is loosely translated as ‘relationships.’ You work very hard at building relationships, friendships, and trust factors … and out of that you’ll have opportunities to talk about business relationships. It’s the primary driver of growing a business in China.”
“Made in the USA” Rebounds
Cronin says manufacturing companies in Georgia are also having success. Factors such as rising wages in China are making the environment in the United States much more attractive for manufacturers. “The main thing we’re seeing is that the demand for US made goods is increasing to the point that you’re seeing the Southeast, which is the breadbasket for manufacturing in the United States right now, doing a lot more exporting,” Cronin says. “Those ships are not necessarily going back empty like they did five or 10 years ago to Asia where we were the mass importer of consumer goods.”
He points to consumer products companies like Georgia-Pacific LLC and Kimberly-Clark Corp., as well as Gulfstream Aerospace Corp. Aircraft and paper-related products are the two largest exports from Georgia to China. Last year, Georgia exported $3.2 billion worth of goods to China. “The demand for American goods is very high,” Cronin says. “I think we’re starting to come to some parity as it relates to trade maybe within the next two to three to five years at most.”
A new top car exporter
South Carolina has seen the one of the largest percentage increases in exports to China in recent years. From 2000 to 2011, exports from South Carolina to China have grown by 2,261 percent from $127 million in 2000 to more than $3 billion in 2011. Clarke Thompson, international trade director at the South Carolina Department of Commerce, attributes that to the $1.5 billion worth of vehicles—primarily BMWs—South Carolina exported to China last year.
Last year, South Carolina surpassed Michigan as the largest auto exporter. BMW is now the largest exporter of vehicles in the United States. “A lot of international companies have come here over time,” Thompson says. “Those companies come here not only to serve this market, they’re finding that, especially European companies, they’re able to make it here for less, and re-export it.”
As for exports to China, Thompson says China’s middle class can now afford to buy nice cars. “The bottom line of the story is the growth of China’s middle class, and the fact that there is money to buy these luxury products,” Thompson says. “That’s probably been one of the driving factors.”
ANNUAL US STATE EXPORTS TO CHINA PASS $100 BILLION FOR THE FIRST TIME
In March, the US-China Business Council (USCBC) released its annual report on US state exports to China, and China once again is America’s third largest export market. As a buyer of US goods, China ranks behind only Canada and Mexico–two immediate neighbors with whom the United States has a regional free-trade agreement.
In 2011, US exports to China grew by 13 percent, up from $91.9 billion in 2010. Since the beginning of the decade, which coincides with China’s accession into the World Trade Organization, the results have been even more striking. Between 2000 and 2011, total US exports to China rose 542 percent, from $16.2 billion in 2000 to a record-breaking $103.9 billion in 2011 (see chart). In addition, US exports to China recovered faster after the recession than exports to anywhere else in the world.
This nearly $90 billion increase in exports to China from 2000 to 2011 exceeded the increase to every other market for US goods and farm products with the exception of Canada. US exports to Canada increased by $102 billion over the same period, while US exports to Mexico rose $86 billion. Brazil was a distant fourth with just a $28 billion increase in purchases of US products.
Forty-eight states have registered at least triple-digit export growth to China since 2000, far outpacing exports to the rest of the world, and 20 of those states have experienced quadruple-digit growth. Thirty states count China as one of their top three export markets, and 25 states exported goods worth more than $1 billion to China in 2011. Ten states have at least doubled their exports to China since 2009, while three of these states—South Carolina, South Dakota, and Vermont—have more than tripled their exports to China in the past two years. The list of top 15 state exporters to China in 2011 includes states not usually thought of as benefitting from trade with China: Michigan, New York, North Carolina, Ohio, Pennsylvania, and South Carolina. Top exports to China in 2011 included agricultural products, computers and electronics, chemicals, and transportation equipment (primarily aerospace and autos).
Airplane exports rise
Behind soybeans, America’s second largest export is civilian aircraft. Last year, US companies sold $6.4 billion worth of aircraft and aircraft parts to China, and most of them originated in the state of Washington thanks to one of the country’s largest exporters, the Boeing Co. Second only to California in terms of its exports to China, Washington exported more than $11 billion worth of goods to China last year. Microsoft Corp. also calls the state home, and farmers have had success exporting some agricultural products. American companies in Washington exported $3.8 billion in agricultural products and $450 million in computers and electronics to China in 2011.
Washington businesses are working to diversify their efforts. “We’re getting more high-tech firms, specifically information technology, aerospace, biotech, medical services, clean energy and the environment,” says Joseph Borich, president of the Washington State China Relations Council. In March, he helped lead a delegation of clean-tech investors to China, most of which had never visited the country before, so they could begin to develop relationships. “It’s rare to find a company that doesn’t keep an eye on China and US-China relations,” Borich says.
Chinese companies set up shop in the United States
As one of the first states to enter China, Maryland officials say their efforts are paying off as the state’s exports as well as foreign direct investment from China continue to grow. Maryland first opened an office in Shanghai in 1996. It’s now the state’s largest international trade office. Last year, the state sold $666 million worth of goods to China. “Without any shadow of a doubt, China is by far the market where Maryland’s efforts are the most aggressive,” says Brad Gillenwater, regional manager for Asia at the Maryland Department of Business and Economic Development.
Last June, a delegation from Maryland including Governor Martin O’Malley travelled to China, Korea, and Vietnam. “As a result of the governor’s trip, we’ve had $85 million worth of investment in Maryland, and it’s growing just as a result of that one effort,” says Maryland Secretary of State John McDonough. For instance, on the trip Baltimore-based firm Premier Rides, Inc. struck an agreement with the developer of the new Great Mall of China being built outside Beijing to construct the world’s tallest indoor roller coaster.
Gillenwater says it has been a two-way partnership, and that more trade will bring more investment. Over the last four years, 15 China-based companies have opened offices in Maryland, and in April the Export-Import Bank of China, which helps finance Chinese exports to other countries, announced it would open its first office in the United States in Baltimore.
“The national arena has national issues,” says Fontaine Bell, chair of the Baltimore-Xiamen Sister City Committee. “At the state and local level, the deals get done.”
[author] Ben Baden ([email protected]) is associate editor of the China Business Review. [/author]