What’s Wrong with the Sino-U.S. Trade Relation?

Ding Gang, Global Times, 2 December 2003

Recently, the American Secretary of Commerce, Don Evans, has indicated that he is willing to negotiate with China on how to solve problems in the bilateral trade relation.

Since the beginning of this year, the U.S. has brought out seven anti-dumping cases against China, involving a huge value worth $1.6 billion. These cases have severely disrupted the normal trade order between China and the United States. What’s wrong with the bilateral economic and trade relation that has been the foundation of the overall Sino-U.S. relationship? Let us take the example of the price of a pair of leather boots to investigate the causes for these trade disputes.

Problem One: Worries over American Jobs Taken Away by Chinese Goods

We here have a pair of exquisitely made leather boots for females. Its price at the time of export is $20. It is made by a shoe factory in China’s Zhejiang Province. Not long ago, at the trade show in New York organized for Chinese products, an American import/export merchant liked the boots and decided to offer an order. Next year, when this pair of boots appears in a store in New York, the price will be $100. According to another import/export merchant, the big difference between $20 and $100 will be shared by the import/export merchant, the wholesaler and the retailer. If the pair of boots attracts attention of a famous shoe brand in the U.S., then slight changes in design and craftsmanship can be made. It will sell for up to $200. This simple fact shows that overwhelming portion of the profits from goods “Made in China”are taken by the American side.

Cheap and good products made in China have reduced America’s pressure from inflation, which further benefits the consumers, enriches the import/export merchants, wholesale and retail business circles. Then, why is it that there always are some people who frequently try to stop the import of Chinese products? Due to structural changes within manufacturing industry in the United States, unemployment has increased in some factories that are fast becoming parts of the “sunset” industries, with a drop in overall competitiveness. As a result, a scapegoat must be found somewhere and China thus has become a convenient target. It is believed that China has taken away their jobs. They have requested that the American government put restrictions on imports from China so that they can protect themselves.

Problem Two: Fear of China’s Advance in Hi-Tech as a Threat to the U.S. Homeland Security

Because of the different political system and ideology, some Americans always tend to view China’s economic development through tinted glasses. The San Jose Mercury News commentator Snyder points out in an article entitled “Transfer of Technology to China Threatens U.S. National Security,”that although China no longer is an enemy of the U.S., it still is a strategic competitor that does not share America’s system of values; that the U.S. does not know which direction China is going, nor does it know eventually in what areas China and the U.S. will have clash of interests; that therefore when China is leaping upward to higher layers of advanced technologies, the Americans are justified to be concerned, especially when it comes to the area of military applications.

For a long period, the so-called monitoring and control measures of the United States have become a big obstacle in the Sino-U.S. bilateral trade. Some Americans believe that even if the restrictions on Hi-Tech transfer to China are lifted, the trade deficit with China would still not go away. Charlene Barshefsky, the former U.S. Trade Representative, states that the U.S. has done some calculations on this matter and reached the conclusion that lifting the restrictions would increase only 3% of U.S. export to China. But in reality, these analyses are still pigeonholed by some dogmas.

Trade should be a bilateral exchange that is based on long-term stability. It cannot be measured by one lump sum purchase of goods, which is especially true in the Hi-Tech industry. Trade also includes other htmects such as services, training, exports and R&D of auxiliary products. But the regulations by the United States government are remarkably vague, making the process of implementing them very complicated. Some factories have complained that businesses are forced to invite experts to guess and analyze whether their products for export to China, especially those dual-use products that can be converted for military applications, are compliant with the U.S. regulations. Earlier this year, the U.S. State Department charged the Boeing Company and the Hughes Inc. with leaking satellite technologies to China, and demanded that the two companies pay fines as high as $60 million. In reality, the charge of leaking technologies to China can never be substantiated. The problem is that the two companies violated the U.S. government’s so-called “operational procedures.”Many businesses have even given up on some products altogether that would have been eligible for export to China.

Problem Three: Serious Flaws in the U.S. Statistics

According the U.S. statistics, there is a huge trade deficit against the American side. But by Chinese statistics, this is not the case. The Chinese numbers point to the fact that between January and September of this year, China has a trade surplus with the United States of $40 billion, with increases in exports by 31.4% and in imports by 26.1%. Yet the American statistics indicates that between January and August of this year, the United States has a trade deficit with China worth $77 billion. Why is there such a huge discrepancy between these numbers? This is because China’s numbers do not include the products that went to the U.S. market through Hong Kong and Macau, while the U.S. statistics adopts a method of counting goods by their origin of manufacturing, i.e., which country should be counted as the place from which the import comes depends solely on where the products are manufactured or substantially re-made.

Since the 1990s, one important reason why China’s exports have increased has been the increase in its manufacturing trade. Yet the American side has insisted on using its own extremely unjustified method of statistics, which includes entrepot trade as “origin of manufacturing”trade. The reason this is unjustified is because, of the price at the time of export, the portion of profit that goes to the original manufacturers constitutes only a small portion. For example, the price of $20 at the time of export transaction for the same pair of leather boots we mentioned at the beginning, if exported to the United States via Hong Kong, should not be counted all as China’s. If it is, as being currently practiced by the U.S., China’s export value will be tremendously exaggerated.

In recent years, the multinationals in the U.S. have been expanding rapidly to the rest of the world, with many medium- and small-sized businesses following suit. Here we only have statistics from five years ago, but they are revealing. In 1998, American businesses had 8 million employees worldwide outside of the U.S. This is more than the total number of employment for the entire manufacturing industries in the overwhelming majority of the nations in the world. Only 30% of the products by America’s overseas business branches were sold in the U.S., the rest were sold mostly in other developed countries.

With an increasing number of American businesses going to China, China is becoming the general assembly base for these American companies’products. In 1994, the China branches of all American businesses shipped back to the U.S. products worth $5.1 billion. In 2001, the same number reached $18.5 billion. The fact that some American businesses shift their production lines to China has created enormous pressure to their domestic competitors, causing, to certain extent, fierce competition among American businesses, and forcing these businesses to speed up the process of moving their production lines overseas. Thus, a significant portion of the profits generated from the products made in China but sold in the U.S. have been taken by American businesses. Again, take the same pair of leather boots as an example. When it is packaged with an American brand name, naturally it is the American company that makes most of the profit out of it. In fact, more than half of China’s popular export, the textiles, have entered the U.S. market in this fashion.

Problem Four: Refusing to Recognize the Benefits that American Businesses Have Received

As early as 20 years ago, the United States entered the post-industrial age, with Hi-Tech and the service industry becoming the economic locomotives. This change in America’s economic structure is an important reason why there has been increase in Chinese products in the U.S. market. The general public feels they are attacked by a deluge of Chinese made products everywhere. But the added value of Chinese goods is small, constituting only a small portion of the entire U.S. economy. According to the U.S. statistics, in 2002, the U.S. bought from China products worth $125 billion; the total volume of the U.S. economy was $10.4 trillion. That is to say, for very dollar the Americans spent that year, only a little more than a penny was spent on Chinese goods.

Facing increasing Chinese products, the American consumers have a dilemma. When they can buy cheap and good Chinese products in the supermarkets, they of course are happy. But if the consumer himself is an employee of the industry that manufactures the same product, or if he is already laid off, he may unleash his discontent onto the Chinese products. The key point here is that after China, as the largest developing country in the world, entered the World Trade Organization, its not just China that needs to learn new things to catch up, developed countries such as the United States should too. The latest trade-related incidents have shown that the Americans have much homework to do in order to catch up. For example, they should know that the increase in America’s unemployment is not a result of the increase in Chinese imports. According to the U.S. statistics, despite the recent setbacks suffered by the American economy, the output of the American manufacturing industry has increased by 40% in the past ten years, doubling what it produced in the 1970s. This is because the American factories are hiring fewer and fewer workers, worker’s skills are constantly enhancing and one worker can finish what might take several workers to accomplish in the past. Unemployment is an American dilemma, as well as a dilemma for China. Chinese businesses are facing a far more severe competition as a result of American entrance into China’s labor market. They have to endure a far heavier burden of unemployment than their American counterparts.

Prospect: Volume of Sino-U.S. Bilateral Trade Will Only Increase But not Decrease

By American statistics, the value of bilateral trade between the two countries was $95.9 million in 1972. Last year, it reached $120 billion. The rate of increase is incredibly rapid in terms of the total value of trade. In spite of this, however, there still exists great potential for further developments in the Sino-U.S. economic and trade relation. In the long run, the volume of Sino-U.S. bilateral trade will only increase, but not decrease. Due to the differences in their political and economic systems, it is expected that trade disputes will continue to exist. A former president of the National Committee on U.S.-China Trade Relations said recently that over the past thirty years there have been constant changes in U.S.-China relation, and in the next thirty years this situation may not cease to exist. China’s role in world economy is rising steadily. The style and contents of the U.S.-China relation are changing as well. Both sides view and expect each other as a world power, with an increasingly sophisticated system of mutual observations. In overcoming a variety of profound problems faced by mankind, and in encountering separate set of challenges to their respective economic and political systems, both countries have a long way to go.