Yuan not the cause of US trade gap: China
BEIJING - Recently, some US senators have blamed China for the Sino-US trade deficit hitting a new high last year, and proposed placing a 27.5% tariff on all Chinese products if China does not revalue the yuan. They believe that if China appreciated its currency, the US deficit problem would be solved. But it is unfair to blame China when one considers the following facts.
Does China export too many products to the United States? No. According to US statistics, since 1994 Canada has been the biggest exporter to the US. In 2004, Canadian exports to the US amounted to US$256 billion, 30% more than Chinese exports that year. Before 2003, the second- and the third-largest exporters to the US market were Japan and Mexico. China became the second-largest only in 2003. The reason why the trade gap between the US and China is so large is that US exports to China are far less than those sent to Canada, Mexico and Japan.
The Chinese government has not manipulated its currency exchange rate to limit imports from any country, including the US. According to Chinese customs statistics, China had a trade surplus of about $32 billion in 2004. Reconciling this figure with US trade statistics implies that China had a huge trade deficit of $130 billion with the rest of the world. In 2004, Chinese imports from Asia accounted for about 66% of its total imports, while imports from the US were only 8% of the total. China ran huge trade deficits with South Korea, Japan, and the ASEAN nations. Including the mainland's trade deficits with Taiwan, the total reached about $127 billion.
Since China opened to the outside world in 1978 and began shifting from a planned economy to a market economy, more and more foreign direct investment (FDI) has come into China. The import and export conditions in China have changed dramatically. Foreign-funded companies in China have been the main drivers of import and export trade; in 2004, imports and exports of foreign-funded companies accounted for about 60% of the country's total trade volume.
FDI in China mainly came from Asian markets, such as Japan, South Korea, Singapore and Taiwan, which invested $16.8 billion in 2004, nearly 50% of the country's total (excluding investment from Hong Kong and the Virgin Islands). Those overseas-funded companies aimed their money at not only the rapidly growing Chinese market, with its 1.3 billion consumers, but also at the country's lower labor costs.
China is a low-middle-income country. The gross domestic product per capita only exceeded $1,000 in 2004. The average hourly wage for urban manufacturing workers is only about $1, 4.7% of the US level. Even if the Chinese currency appreciated by 100% over the US dollar, the average hourly labor cost in China would still amount to only $2, less than 10% of the US level. And the majority of Chinese still live in rural areas, providing an abundant and low-cost labor supply.
These lower labor costs have triggered a massive shift of Asian manufacturing capacity and export orders to China, especially from Japan, Taiwan, and South Korea, whose investments are export-oriented. Originally they produced products at home to export to US. Now they have moved the work to the Chinese mainland. Initially, labor-intensive export industries such as apparel, footwear, toys, and furniture moved to China. Later, technology-intensive industries, such as notebook computers, hard disk drives, and chip fabrication moved here also.
As a result, China has become increasingly integrated into the global manufacturing and supply chain. There are more and more Japanese and South Korean brands of electronic goods sold in the US market with a "Made in China" label. These trends are obviously related to the shift of many export-oriented production lines from leading Asian economies to China.
China needs to import more raw materials, parts, equipment and machine tools both for export purposes and its domestic market. But the main import sources are from Asia, not the US. In 2003, imports from Japan, Taiwan and South Korea by overseas-funded companies totalled $116 billion, accounting for more than half the mainland's total imports, while imports from the US were just 7.5% of the total.
There are several reasons why foreign-funded companies in China prefer importing from Asia to importing from the US. First, a large fraction of Chinese imports were related to processing and assembly activities of foreign-funded companies in China. The manufacture of major parts, components, equipment and technology needed by assembly lines has generally remained in the home countries. Consequently, when the assembly lines are operating, they need to frequently import from the foreign-funded companies' parent companies, which are mostly located in Asia.
Second, many companies, especially Japanese and South Korean subsidiaries in China, usually purchase goods from their own industrial group (i.e., their parent company, or another subsidiary of the parent company) in their home countries. Third, because Japan, South Korea and ASEAN economies are Chinese neighbors, they have a structural advantage in transportation costs compared to US companies exporting to China. Fourth, quality goods from Asia are generally cheaper than equivalent items from the US because of lower labor costs. For instance, in 2003, the hourly wages of manufacturing workers in South Korea were about 47% of those in the US.
Fifth, China is a big high-tech importer now, and many high-tech products can only be produced by the United States. According to US statistics, in 2003 China imported US aircraft, nuclear reactors, machinery and equipment worth $10.6 billion, accounting for 40% of China's imports from the US. High-tech items are an area in which US manufacturers have a comparative advantage. But this advantage has been weakened by some US policies, especially the rigid controls over such exports to China. Partly as a result of this, in 2003, US high-tech exports to China constituted 10% of the total Chinese high-tech imports, with the US ranking as just the fifth-largest source of China's imports of such goods.
The conclusion is clear: The reason for the US trade deficit with China is not China's currency exchange rate. The key problem is American policies that cause US manufacturers to lose their comparative advantages to other exporters. If the US truly wishes to compete on a fair and open playing field, it should review its policies, including its erroneous trade policies regarding China, rather than simply making China a scapegoat. To place tariffs on all Chinese products will only hurt the interests of both countries.
(Asia Pulse/XIC)
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