Op-Ed Contributors

The surplus of promise

By Chen Deming (China Daily)
Updated: 2010-03-31 07:51

(c) Export control against China has exacerbated the trade imbalance. The US has practiced a policy of export control against China for many years. Rigid control has forced many Chinese users away from the US to buy from others. China's hi-tech imports increased rapidly in recent years, but US shares have dropped from 18.3 percent in 2001 to 7.5 percent in 2009. If the share in 2001 is a benchmark, US companies have lost at least $33 billion worth of export opportunities in 2009.

According to many Chinese chambers of commerce, by 2020 China's import demand on integrated circuits, machine tools and civil avionics will reach over $600 billion. But many of these products are subject to US export control.

(d) To explain the US' long-running deficit, you must first understand that the dollar is the global reserve currency. In 1960, Professor Robert Triffin from Yale University pointed out that the dollar, as the global reserve currency, must flow out of the US through a balance-of-payment deficit to satisfy a country's needs for trade settlement, debt repayment and international reserves. But as international trade and investment grows, the demand on the dollar will increase, pushing up the US trade deficit, which in the long run will threaten the dollar's stability as well as its role as the global reserve currency. Today the US is still caught between generating liquidity for the rest of the world through current-account deficits and maintaining the stability of its currency.

(e) Renminbi appreciation cannot redress the trade imbalance. It has been proven both in theory and in practice that the appreciation of a nation's currency provides little help for improving the balance of payments. From 2005 to 2008, the renminbi appreciated by 21.1 percent against the US dollar, whereas US trade deficit accounted for 5.9 percent of its GDP and its annual trade deficit with China soared by 21.6 percent on average, the biggest and fastest increase ever. In 2009, the renminbi exchange rate against the US dollar was basically stable whereas the share of trade deficit in US GDP decreased to 3.5 percent from 5.7 percent in 2008. Its deficit with China was down 16.1 percent in 2009.

II. China's and the US' gains from bilateral trade and economic relations are roughly balanced.

Trade and economic cooperation has generated great benefits not only for China but also for the US. One would be looking narrowly at the whole trade outlook by equating China's trade-in-goods surplus with China winning and the US losing.

(a) Chinese exports benefit American people. China's exports to the US have substantially improved the welfare of American consumers and producers. The bulk of US imports from China are consumer goods, with textiles and garments, footwear, toys, furniture, bags and cases taking up 30 percent, with appliances and electronics at 45 percent. These goods have served as an effective damper on inflation in the US. According to research by Morgan Stanley, imports from China saved American consumers about $100 billion in 2009. Restrictions on imports from China would reduce the welfare of the American people, especially those with low incomes.

(b) China gets the surplus yet the US gets the real gains. Processing trade represents 60 percent of Chinese exports to the US. In 2009, processing trade accounted for $117.6 billion or 82 percent of China's surplus with the US. Chinese processing firms take orders, produce goods and export for a meager processing fee, whereas foreign firms, especially US companies, reap massive profits in areas such as product design, transportation, warehousing, and marketing. An example in the Economist is a glaring one: an iPod carrying the "Made in China" label is sold for $299, but the Chinese assembling plant only gets $4 while about $160 go to US companies.

(c) The US' gains go beyond trade in goods. The US has made huge profits on their investments in China and its services trade with the Asian nation. Currently, some 30,000 American-funded companies operate in China. According to the American Chamber of Commerce in China in 2009, about 74 percent of American businesses in China made a profit in 2008 and 81 percent were optimistic about their business outlook in China for the next five years. In services, the US has held China in deficit for long and its surplus with China has been growing by an annual rate of 35 percent in the past five years. In the absence of complete statistics on China-US trade in services, rough estimates suggest China's deficit ranges between $13 billion and $15 billion.