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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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