China-U.S. Trade Issues: Context and Perspective

Overview & Comparison: China and U.S. 2006ChinaU.S. Total GDP (US $) $2.67 trillion$13.20 trillion 5.5% of world27.4% of world PPP (international $) $10.05 trillion$13.20 trillion 15.0% of world19.8% of world Per Capita GNI$2,010 – Rank 129$44,970 – Rank 10 Per Capita PPP$7,740 – Rank 102$44,240 – Rank 4 See more data on handout

GDP Comparison: China and U.S. ChinaU.S. Agriculture 11.9%1.2% Industry 47.0%24.2% Service41.1%74.6% Export, % of GDP 36.8%11.2% Import, % of GDP32.9%15.1%

U.S. Trade Deficit (in $ billion)

Trade Deficit: Debate and Policy Orientation Major Market of Trade Flow of China

Trade Deficit: Debate and Policy Orientation Major Market of Trade Flow of China China counts for 4% of NC export, ranking 5 th, percentage change was 19.4% increase in the year of 2005

Trade Deficit: Debate and Policy Orientation Does trade deficit matter? Impact on overall job and economy: No U.S. unemployment 4.8%, has decreased North Carolina unemployment 4.8% (6.5% in 2003) Employment in T/A industry: decreased, Yes. It does affect sustainability and stability

Trade Deficit: Debate and Policy Orientation Is the U.S.-China trade deficit made in China? The Chinese story: “export processing” Foreign-invested enterprises - counts for about 50% export from China Example: The iPOD Analysis Bilateral trade deficit with China = $150 Components by Japanese company, US company, etc Final assembly cost $4 for each unit in China 10% Wal-Mart purchase in China is from Chinese owned firms Question - Who benefits from this process?

Trade Deficit: Debate and Policy Orientation Is the U.S.-China trade deficit made in China? The Chinese story: US high-tech export censorship “China’s rapid military modernization and increases in capabilities have raised important questions about the purposes of this buildup….America’s export controls must support our longstanding arms embargo and not allow exports that would make a direct and significant contribution to China’s military”. “The United States has noted that China’s military, like many others, is relying on commercial technologies to enhance and enable certain weapons systems. We therefore believe imposing controls on a focused list of technologies … is an appropriate reflection of America’s larger foreign policies.” C. A. Padilla, Assistant secretary of commerce Remarks on Jan. 29 of 2007 in China

Trade Deficit: Debate and Policy Orientation Is the U.S.-China trade deficit made in China? The U.S. story: under-valued Chinese currency Renminbi U.S. Policy – China should appreciate its currency value e.g. Schumer-Graham bill – 27.5% Response from China (effective from 21 June 2005) Renminbi is no long tied with US$ New criteria – tied to a basket of foreign currencies (major trade partners) Renminbi has appreciated about 10% against US$ Q – Does currency exchange rate matter and how much does it matter?

Trade Deficit: Debate and Policy Orientation Q – Does currency exchange rate matter and how much does it matter? Fact: Renminbi has appreciated, but US-China trade deficit increased from 2006 to Trade data with major US trade partners show: When foreign currency appreciated against US$ from 2000 to 2005: While export from US increased, import into US increased more, thus trade deficit has increased.

Trade Deficit: Debate and Policy Orientation % Change from US Currency vs. foreign currency U.S. Import Value (US $) U.S. Export Value (US $) U.S. Trade Balance (US $) Canada Euro-12 Mexico China Japan United Kingdom S. Korea Taiwan Malaysia Brazil % % 12.73% -1.00% % % % -6.94% -0.34% % 37.57% 33.31% 26.31% 94.40% 13.67% 25.91% 22.33% 8.04% 40.66% 56.29% 31.38% 29.80% 23.16% 89.07% 7.70% 16.33% 22.57% 19.95% 1.04% 23.99% 58.27% 39.05% 34.71% 95.55% 18.07% 70.63% 21.92% -8.04% 70.77% % US Trade Pattern with Top Ten Partners from 2002 to 2005: Currency and Trade Flow

Trade Deficit: Debate and Policy Orientation Q – Does currency exchange rate matter and how much does it matter? Interviews: Manufacturer 1 – home furnishing product Price from China is increasing Transition of Sourcing to India partially, China advantage: skill, quality and infrastructure. Manufacturer 2 – high end fashion product Renminbi doesn’t matter much Main concern about China: increasing labor cost and tax rebate to exporter by Chinese government New sourcing possibilities: South Korea and Peru Reason – New US free trade agreements

Trade Deficit: US/China macroeconomic condition Re-valuation of Renminbi can only diverge trade or trade deficit but will not matter to a significant reduction of U.S. trade deficit. US macroeconomic condition: High budget deficit High consumption demand – over 70% of GDP Expenditure increase exceeds income increase High per capita income, PPP rank 4 China macroeconomic condition: High foreign reserve – 1.53 trillion low consumption demand – about 47% of GDP Saving rate of 30% disposal income Lower to medium per capita income, PPP rank 102

Trade Deficit: Debate and Policy Orientation Is the U.S.-China trade deficit made in China? The U.S. story: increased import from China is responsible for the job loss in the United States – “Outsourcing America” Evidence: Closed textile and apparel plants and lost manufacture jobs in North Carolina and in U.S. Argument from China: Chinese export to the U.S. market mainly displaced third party suppliers rather than increasing the overall T and A import of U.S. What does the data say?

Trade Deficit and Job: Case of Textile and Apparel industry Source: Calculated from U.S. International Trade Commission report

U.S. Apparel Import: Share of China = 30.8%

Majority U.S. imported apparel products are from developing countries with cheaper labor U.S. Consumer Goods – Price change from 1993 to 2006 Price of apparel decreased 10% while all other consumer goods prices increased Ref. IIse Metchek, 2007

U.S. Approach to Trade Deficit: Sectoral trade policy – textile and apparel Why focus on textile and apparel: U.S. trade policy toward China: Safeguard Actions – quantitative limit on the import of certain Chinese textile and apparel product.

U.S. Approach to Trade Deficit: Sectoral trade policy – textile and apparel Textile and Apparel Trade Policy: - Safeguard measures embedded in China’s WTO accession agreement, effective till End of quota starting Jan Agreement on Textiles and Clothing (ATC): Quota phase out in three phases, under WTO Multi-fiber Arrangement (MFA) – Bilateral Agreement to regulate trade of textiles and clothing through quota : “Avoidance of Market Disruption” added to GATT. Short- Term Arrangement and Long-Term Arrangement s: Voluntary Export Restraint (VER) – response to cotton product export increase from Japan (admitted to GATT in 1955)

U.S. Approach to Trade Deficit: Sectoral trade policy – textile and apparel I agree…that sweeping changes in our foreign trade policies are not necessary. Nevertheless, we must recognize that the textile and apparel industries are of international scope and are particularly susceptible to competitive pressure from imports. Clearly the problems of the industry will not disappear by neglect nor can we wait for a large scale unemployment and shutdown of the industry to inspire us to action. A comprehensive industry-wide remedy is necessary. Letter of John F. Kennedy, August 31, 1960 [Dickerson, 1999, p.345]

U.S. Approach to Trade Deficit: Sectoral trade policy – textile and apparel Comments by U.S. Chief Textile Negotiator: There were strong domestic political pressures urging the U.S. Government to take unilateral action and establish import quotas. As action of this type would be contrary to the generally liberal trade policies of the U.S. in recent years, this government has advanced its proposals for a multilaterally acceptable solutions. STA negotiation ( ), GATT Document. [Dickerson, 1999, p.346]

Current trend of U.S. trade policy U.S. Free Trade Agreement with selected partners: New agreements: South Korea, Peru etc. Analysis: regional free trade agreement does not create trade but divert trade from one place to another. Geopolitical factor

Current trend of U.S. trade policy U.S. Free Trade Agreement with selected partners: New agreements: South Korea, Peru etc. Analysis: regional free trade agreement does not create trade but divert trade from one place to another. Geopolitical factor

Which one is better for the U.S.: a stronger and stable China or a weaker and wobbly China Trade policy development: Economic concern Social concern and Geopolitical concern

Questions?