CHINA AND THE US ECONOMY · • The US economy is far larger than China’s. In the past decade alone, the US economy grew by the equivalent of the entire Chinese economy. China is

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CHINA AND THE US ECONOMY: Advancing a Winning Trade Agenda

A Guide for the 112th Congress

April 2011

The US-China Business Council (USCBC, www.uschina.org) is the leading organization of US companies engaged in business with the People’s Republic of China. Founded in 1973, USCBC provides

extensive non-partisan China-focused information, advisory, program, and advocacy services to roughly 220 US corporations operating within the United States and throughout Asia.

© 2011, The US-China Business Council ii

Executive Summary

An Agenda for the 21st Century: Few issues loom as large on America’s economic and foreign policy agendas as our relationship with China. This is a defining global strategic issue for the United States. (Page 1)

US exports to China are strong and getting stronger. China has been our fastest growing export market since it joined the World Trade Organization and is the only major market since 2000 to have averaged the 15 percent growth per year needed to meet President Barack Obama’s goal of doubling US exports by 2014. We need to build on our success by pushing for further market openings for American companies doing business with China. (Page 3)

•For Smaller US Companies, the future is now. America’s small- and medium-sized companies are succeeding in China, too, but we can do more to help them access China’s market. (Page 6) • A single-minded focus on China’s currency is a distraction. Yes, an exchange rate that better reflects trade flows is important. Yes, a multilateral, comprehensive look at global imbalances is necessary. But China’s exchange rate is not the significant factor in the US trade deficit or US employment that many make it out to be. The renminbi (RMB) has appreciated roughly 25 percent against the dollar since 2005, and it has moved at an annualized pace of nearly 6 percent since June 2010. (Page 8) • The US economy is far larger than China’s. In the past decade alone, the US economy grew by the equivalent of the entire Chinese economy. China is rapidly developing, but the United States has a much stronger foundation upon which to build. In fact, the US and Chinese economies are greatly interdependent and need each other to succeed. Further, with a population of more than 1.3 billion and increasing consumer wealth, it is only natural that the Chinese economy will one day be larger than ours. Rather than being viewed as a threat, this should be viewed as an opportunity for US companies to participate, and benefit, from that growth. (Page 11)

“Caterpillar’s business is growing around the world—69 percent of our sales in 2009 were outside of the US. But that doesn’t mean we are losing our focus in the US....These facilities support local economies and contribute to the $10.4 billion in US exports Caterpillar had in 2009. Those exports support tens of thousands of jobs, which are tied directly to the global economy.”

—Doug Oberhelman, CEO, Caterpillar

© 2011, The US-China Business Council iii

• US manufacturing faces an array of challenges, but our competitive future mainly depends on us, not China. Despite recent estimates otherwise, the National Association of Manufacturers has stated that the United States remains the world’s largest manufacturer. But steps need to be taken, especially here at home, to ensure that the US retains its competitive edge. (Page 13)

• US services exports to China are growing and hold the potential to get even stronger. The United States has a services trade surplus with China, and services industries account for 80 percent of private sector jobs in America. These include high-quality, high-wage jobs in the financial, logistics, and legal sectors, to name a few. (Page 15)

• US companies in China: In it to win…market share. Most American companies do business in China, including manufacturing goods there, to access its local market—and those operations strengthen US companies here at home. (Page 17)

• The changing East Asian export machine. It is unrealistic to think that everything can be made at home, but it is realistic to think that some items assembled abroad include significant US-made content. Overall US import patterns from East Asia as a whole remain unchanged. Only the exporting economies—China instead of Japan, Taiwan, or South Korea—have changed, and that has opened up new opportunities, in turn, for US companies in a new and growing market. (Page 21) • We have options when China doesn’t play fair. Direct negotiation with China is the best first approach to deal with problems American companies have with China.

“Our China and other international businesses support many high-skilled P&G jobs in the US—in engineering, R&D, marketing, finance, and logistics. One in five of our 40,000 US-based P&G employees supports our businesses outside the US. Forty percent of our 15,000 employees in Ohio work on international business. The simple fact is that success in fast-developing markets like China leads to secure, high-wage jobs here at home.”

—Bob McDonald, CEO, Procter & Gamble

“Our success in our global markets has a direct benefit to Indiana, where we are creating the kind of high-paying professional jobs that strengthen our community. Simply put, growth in international markets like India, China, and Brazil creates jobs in Indiana.”

—Tim Solso, Chairman and CEO, Cummins

© 2011, The US-China Business Council iv

But we also can use other sound legal tools—such as anti-dumping investigations and WTO cases—and have done so successfully. (Page 22)

• US companies are a positive influence in China. From human resources practices to environmental issues, the impact of US companies has been beneficial. The US business presence will continue to positively affect the development of the rule of law, civic institutions, and specific issues such as food and product safety in China. (Page 23)

• Most of the answers are here at home. To succeed in the years ahead, we need smart policies on taxation, energy, education, infrastructure, trade, investment, and innovation to maintain the competitive leadership of American companies and workers. (Page 24)

© 2011, The US-China Business Council 1

The United States and China: An Agenda for the 21st Century

ew issues loom as large on America’s economic and foreign policy agendas as our relationship with China. The current domestic and international landscape may

offer more immediate issues clamoring for attention, but China is the enduring challenge—and opportunity—for the United States that has emerged in the new century. There is much to be gained, in both economic and strategic terms, if we get the relationship right. Economic and strategic difficulties lie ahead, however, if we don’t. This is a defining global strategic issue for the United States. A careful look at the facts shows that while China is rapidly making its way up the ladder of global economic and political importance, its domestic and international practices are still being shaped, opening the door for the United States to influence this process, if handled deftly. America’s economic opening to China three decades ago and the careful relationship that has been established since then are fundamental assets upon which to build. China is now the third-largest buyer of US exports. US companies are establishing roots in China to sell to the Chinese market, and in the process they are bringing jobs to their US operations and high-quality global standards and business practices to China’s still-evolving social order. Though much is made of China’s rise to become the second-largest economy in the world in 2010, China’s per capita GDP—the average

Chinese citizen’s share of the country’s overall economy according to the International Monetary Fund—is about $4,200 (ranking them 94th globally) compared to $47,100 for the average American. And though many focus on the US trade deficit with China, the proportion of our global deficit coming from Asia, including China, is about equal to what it was 10 years ago and China’s prominence largely reflects a change in our trade patterns with the region. The current economic challenges may cause temporary shifts, but the long-term trends are clear—and the need for a clearheaded, stable approach to China is more important than ever. We’re not in this alone. China is in the same place. Its economic and strategic success also requires working with the United States on major issues such as market access, intellectual property protection, energy, the environment, consumer safety, and trade and financial policies. The United States has a window of opportunity to build an enduring, constructive, and mutually beneficial relationship with China. To reach that goal, we need policies that are based on facts, not fears; that foster and follow rule of law; and that bolster and then build upon the deeply rooted strengths of US industrial and technological innovation. And we need to act now. The US-China Business Council looks forward to working with the new Congress as it develops policies that will support our nation’s long-term, sustainable goals.

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Action Plan In our contacts with Beijing, we should

• Ensure the continued opening of China’s economy to accelerate the rapid growth of US exports to China and enhance the role of US companies selling goods and services in the Chinese market. This helps US companies and workers by bolstering the job base in the United States. It also brings US business standards and practices to China.

• Work to bring China into a constructive and more participative role as a global stakeholder on international economic issues. This is a long-term, step-by-step process.

• Size the government-to-government dialogue to fit today’s larger and more complex commercial relationship. As we saw with President Hu Jintao’s state visit, there is no substitute for regular, high-level, well-coordinated, and forward-looking engagement between top-level economic, trade, and other officials on major issues such as market access, intellectual property protection, energy, the environment, food and product safety, financial and currency policies, global economics, and open investment environments. We should build on the successful foundation of the US-China Strategic and Economic Dialogue and the US-China Joint Commission on Commerce and Trade and add more resources to the Office of the US Trade Representative to better enforce trade rules.

• Engage Chinese business leaders in developing a mutually-constructive dialogue to enhance and support our economic agenda. There are opportunities to build on areas of consensus to address issues on our common agendas like trade and investment.

• Keep pressing forward for a rules-based trading relationship, through bilateral contacts and established legal channels such as the World Trade Organization.

• When good-faith dialogue with China fails to resolve problems with China, the United States should use legally sound trade remedies and dispute settlement mechanisms such as WTO cases when well-defined, winnable, and supported by industry.

And on the home front, we should

• Support executive branch agencies and state governments in their efforts to promote US exports abroad and bring needed, job-creating investments into the United States.

• Further strengthen the leadership role of US companies as export engines at home and in their role in the international economy, especially in technologies and in sectors that will become global twenty-first century leaders.

• Use America’s role as host of the 2011 Asia-Pacific Economic Cooperation (APEC) to promote engagement by small- and medium-sized companies in Asia and especially China.

• Take steps to bolster the long-term competitiveness of the US economy by adopting smart policies on taxation, energy, education, infrastructure, trade, investment, and innovation.

• Help displaced workers transition to growth sectors of the US economy with cost-effective programs that provide the tools to succeed in the international economy.


US Exports to China Are Strong and Getting Stronger

hile we fixate on imports from China, we sometimes miss the fact that US exports to China are booming, notwithstanding the negative impact of the global

economic downturn on trade flows during the past two years. In fact, China is now America’s third-largest export market—$118 billion in 2010 when Hong Kong is included. Over the past decade, China was the only major US export market growing fast enough to meet President Barack Obama’s goal of doubling US exports by 2014, having grown about 468 percent since 2000. 2010 was a record year for US exports to China. Top American exports in 2010 included computers and electronics, agricultural products, chemicals, transportation equipment, and other machinery, particularly airplanes. There is no doubt that the Chinese market will be a critical part of fulfilling the president’s goal. As Caterpillar’s CEO Doug Oberhelman explained in a Chicago Tribune column last fall:

“Caterpillar’s business is growing around the world—69 percent of our sales in 2009 were outside of the US. But that doesn’t mean we are losing our focus in the US. When we expand globally, it increases the demand for the components, products, and services that we and our suppliers make right here. Caterpillar is investing and growing in the US and overseas. We must make those investments if we are to remain the global leader in our industry and a major employer in the US. For example, we are investing about $500 million to increase capacity for mining trucks made in Decatur, Ill., —where nearly 90 percent of some models are exported—and to bring a new line of mining shovels to our Aurora facility. These facilities support local economies and contribute to the $10.4 billion in US exports Caterpillar had in 2009. Those exports support

tens of thousands of jobs, which are tied directly to the global economy.”

Every state has seen a dramatic increase in exports to China—often approaching or exceeding 300 percent—since 2000. For information on exports from all 50 states and 435 congressional districts, including links to local news stories on US companies doing business with China, see www.uschina.org/public/exports/congressional. Keep in mind that this data only reflects the goods that we export to China—that is, the physical products that are manufactured here. We also export services, such as insurance products and engineering services, as well as provide express delivery and health care in China, supporting thousands of jobs here in the United States. American services providers are world leaders in their fields, so much so that we have a services surplus with China—we sell them more services than they sell to us. At a time of economic challenge, encouraging and supporting export expansion to the fastest growing market for US products makes sense—for manufacturers, service providers, farmers, and workers.

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Action Plan

• Increase emphasis on further opening of China’s economy to US exports and China-based operations.

• Direct the US Ex-Im Bank to make support of US exports to China its top priority.

• Increase the Department of Commerce’s Foreign Commercial Service resources in China to support US company exports, especially small- and medium-sized companies’ exports.


China’s World Trade Organization accession has accelerated US export growth.

US Exports to China ($ billion)

Exports take off as recession subsides

China’s WTO entry

US exports to China far outperformed export growth to other markets.

Growth in US Exports to Top 10 Markets, 2000-10

Source: US Department of Commerce


Top 10 US Export Markets, 2010 ($ billion) China and Hong Kong Listed Separately

1. Canada $248.2

2. Mexico $163.3

3. China $91.9

4. Japan $60.5

5. United Kingdom $48.5

6. Germany $48.2

7. South Korea $38.8

8. Brazil $35.4

9. The Netherlands $35.0

10. Singapore $29.1

China and Hong Kong Combined

1. Canada $248.2

2. Mexico $163.3

3. China and Hong Kong $118.4

4. Japan $60.5

5. United Kingdom $48.5

6. Germany $48.2

7. South Korea $38.8

8. Brazil $35.4

9. The Netherlands $35.0

10. Singapore $29.1

What the US Buys from China What the US Sells to China

1. Computer and Electronic Products 1. Computer and Electronic Products

2. Manufactured Commodities 2. Agricultural Products

3. Apparel and Accessories 3. Chemicals

4. Electrical Equipment and Appliances 4. Transportation Equipment

5. Leather and Allied Products 5. Machinery, Except Electrical

6. Machinery, Except Electrical 6. Waste and Scrap

7. Furniture and Fixtures 7. Primary Metal Manufacturing

8. Fabricated Metal Products 8. Food and Kindred Products

9. Plastic and Rubber Products 9. Paper

10. Chemicals 10. Minerals and Ores

China is the 3rd-largest US export market.

Integrated trading relationship: US imports from China often have US content.


Source: US International Trade Commission


For Smaller US Companies, the Future Is Now

“Brazil, India, and China are among the fastest growing emerging markets and offer great opportunities for US exporters. It can be challenging, though, for US companies—especially SMEs [small-and medium-sized enterprises]—to navigate through complex governmental taxes and regulations.” —Report to the President on the National Export Initiative, September 16, 2010

e couldn’t agree more. Little known, however, is that China is already the third-largest export market for American

small- and medium-sized enterprises (SMEs), with sales reaching $23.5 billion in 2008 or more than one-third of all US exports to China that year. Include Hong Kong, and the total rises to just shy of $33 billion. That’s equivalent to all US exports to Brazil and more than America’s total exports to France that year. Many Americans no doubt would be surprised to learn that these smaller and mid-sized firms also account for 35 percent of total US exports to China, which is slightly better than the 31 percent of their share of American exports to the rest of the world. Congressional representatives should be pleased to know that a total of 27,742 small and mid-sized firms from all across America exported to China in 2008. To find out about some of these companies’ business with China, visit www.uschina.org/public/exports/2000_2010/ and click on any state to see local news stories on their operations. Though small and mid-sized companies are already benefitting from the rise of China as an export destination, we think the United States should aim to do even better.

Many companies face challenges that would be less daunting if supported by an expanded US Foreign Commercial Service presence in booming Chinese second- and third-tier cities. That will require increased resources for the Commercial Service—one such proposal has already been put forth in the US-China Market Engagement and Export Promotion Act (HR2310 and S1616) introduced by Congressman Rick Larsen, now-Senator Mark Kirk and Senator Maria Cantwell in the 111th Congress. And, we would do our small businesses a great benefit by ensuring the US Ex-Im Bank prioritizes lending to support American export sales to China. China’s economy is growing—and we’d like to see more “Made in America” labels join that growth.

W

Action Plan Increase resources for the Foreign

Commercial Service to assist small- and medium-sized companies to export to China.

Ensure the US Ex-Im Bank prioritizes financing support for exports to China.

Support the efforts of the National Export Initiative, which includes priorities for smaller enterprises.

Use America’s role as host of the 2011 Asia-Pacific Economic Cooperation (APEC) to promote engagement by small and medium-sized companies in Asia and especially China.


Top 10 US Export Markets for Small- and Medium-Sized Companies, 2008 ($ billion)

China and Hong Kong combined are a $33 billion market for US small- and medium-sized companies.

Growth in Top 10 US Export Markets for Small- and Medium-Sized Companies, 2000-08

China is the fastest growing export market for US small- and medium-sized companies.




How Much Does China’s Exchange Rate Affect the Trade Deficit?

nswer: Probably less than you think. Yes, an exchange rate that better reflects and responds to trade flows is important.

Yes, a multilateral, comprehensive look at global economic imbalances is necessary. But China’s exchange rate is probably not the significant factor in the US trade deficit that some make it out to be. First, many of the goods the United States used to import from Japan, Taiwan, and other Asian economies now come from China because Asian companies have shifted their export manufacturing base there. As China’s share of the US trade deficit has risen with this shift, the share of the US deficit from the rest of East Asia has declined. The figure on page 10 clearly shows this trend. Think of it this way: Ten or fifteen years ago when you bought a TV, the label probably read “Made in Japan” and was an import. Today, that TV now says “Made in China”—and is still an import. To suggest, as some have, that if an item were not imported from China, it would be made in the United States is misleading, at best. Further, the RMB appreciated nearly 20 percent between 2005 and the start of the global recession in 2008 as a result of steady engagement and negotiation. During this period of significant RMB appreciation, the US trade deficit continued to grow, underscoring our point about the limited relationship between the exchange rate and the trade deficit. China halted exchange rate movement in July 2008 because of developing uncertainties in global financial markets. When financial markets stabilized and China saw export growth again, its central bank announced a return to exchange rate flexibility in June 2010. China has resumed gradual appreciation, which will likely continue as long as politics don’t intervene—especially given the country’s rising inflation and its oft-stated desire for rebalancing its domestic economy. It also is important to note that US companies selling to China do not cite the exchange rate as a competitive barrier—and our 468 percent growth in exports to China since 2000 underscores that. Every year, the US-China Business Council (USCBC) surveys its members on the barriers that impact

their business with China. The exchange rate never ranks as a top issue harming their sales. Clearly, there are factors that make China’s exports to the United States cheaper than those produced in other countries or, in some cases, domestic products. If those factors are due to unfair trade advantages, we should go after them with the appropriate trade tools. But focusing on the exchange rate to solve the trade deficit is the wrong approach. Legislation that imposes a tariff on imports from China to offset currency undervaluation will violate World Trade Organization (WTO) rules and tax US consumers without getting us any closer to the objective of moving China toward a market-driven exchange rate. It’s hard to find a winner in this type of action, but the clear loser would be American households. So, what should be done? USCBC supports an exchange rate that better responds to China’s global trade flows. The Obama administration had it exactly right last year when it said it would pursue a multilateral approach to global imbalances, including exchange rate issues. And, when China is found to be flouting international trade rules, we should seek direct negotiations to resolve the issue. If good-faith dialogue fails, we should use rules-based trade tools—such as anti-dumping investigations and WTO cases, when well-defined, winnable, and

A Think of it this way: Ten or fifteen years ago when you bought a TV, the label probably read “Made in Japan” and was an import. Today, that TV now says “Made in China”—and is still an import. To suggest, as some have, that if an item were not imported from China, it would be made in the United States is misleading, at best.


supported by industry—to seek redress. The US government has done this with WTO cases on China’s export subsidies, auto parts import barriers, financial news services market access barriers, and intellectual property rights. But we are deceiving ourselves if we think that fixing China’s exchange rate will significantly affect the trade deficit, or the decades-long decline in manufacturing jobs due to productivity increases.

Action Plan

• Use bilateral trade remedy tools consistent with international rules, such as anti-dumping investigations, and multilateral dispute settlement mechanisms such as WTO cases when well defined, winnable, and supported by industry, to eliminate unfair advantages and level the playing field for US companies.

• Increase emphasis on multilateral discussions to enhance progress already made toward bringing the RMB’s value in line with the global marketplace.

• Continue to focus on China’s financial reforms (including market openings to US financial services providers) as the ultimate solution to achieving a fully convertible currency and a truly market-driven RMB exchange rate.


Composition of the Global US Trade Deficit

China’s share of the US trade deficit reflects East Asia consolidation.

China

Rest of East Asia

Rest of World

2005-08 RMB strengthens dramatically,

trade deficit grows.

The RMB-USD Exchange Rate Shows Little Correlation with the Bilateral Trade Deficit

2008-09 RMB exchange rate steady,

trade deficit drops.

Deficit ($ billion) RMB/USD

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Bilateral trade deficit

RMB/USD

Source: US International Trade Commission and the International Monetary Fund

Source: US International Trade Commission


Is China’s Economy Really about to Surpass the US Economy?

O, not even close. That day will come, given China’s population of 1.3 billion people, but it is far in the future.

The US economy is well over twice the size of China’s. On a per capita basis, the US economy is nearly twelve times bigger. The longer-term trend shows that the United States grew by the equivalent of the entire Chinese economy in the past decade. Or looked at another way, China’s population has a per capita GDP—the average Chinese citizen’s share of the country’s overall economy—of about $4,300 (94th globally) compared to $47,100 for the average American. In addition, the United States has a significant stake in seeing China’s economy continue to prosper. US manufacturing, agricultural, and services exports will grow as China’s economy develops and more Chinese move into the middle class. In fact, the growth of China’s domestic market opens up a major new avenue for US companies to gain strength by selling goods and services in China. Many of these goods may be made in China, because distance and lead times mean a company cannot serve every customer in China from a US base. But even these product and service sales require design or service support, or component supply, from US facilities; these sales strengthen companies’ core operations—and job bases—in the United States. In a column in the Cincinnati Enquirer last year, Procter & Gamble CEO Bob McDonald explained it well:

“…[O]ur China and other international businesses support many high-skilled P&G jobs in the US—in engineering, R&D, marketing, finance, and logistics. One in five of our 40,000 US-based P&G employees supports our businesses outside the US. Forty percent of our 15,000 employees in Ohio work on international business. The simple fact is that success in fast-developing markets like China leads to secure, high-wage jobs here at home.”

There is much to be gained from a trade policy that encourages China to be more open to US companies, especially when the US domestic economy is seeking to gain sounder footing. In fact, the US and Chinese economies are greatly interdependent. For instance, the United States is China’s second-largest export market; China is our third-largest export market. US companies across every industry have invested in China, primarily to reach China’s domestic market; Chinese companies in turn are beginning to invest in the United States, with the prospect of creating jobs here at home. We should make it easier for China to buy from us. Streamlining the entry visa process for Chinese customers of US goods and services not only will help increase sales for US companies, it also will provide additional sales for US airlines, restaurants, and other service sector companies that cater to business travelers. The US Ex-Im Bank should make lending support for US exports to China its top priority. The conclusion should be obvious: Our economic success in the years and decades ahead is mutually dependent. We need more engagement and cooperation with China, not less.

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Action Plan • Increase emphasis on further opening of

China’s economy to US exports and China-based operations.

• Encourage China’s constructive involvement in global economic policy issues.

• Streamline the visa application process for legitimate customers of US companies to make it easier for them to visit the United States to buy our products and services.

• Prioritize US Ex-Im Bank support for US exports to China.


US and China GDP Comparisons, 1990-2010 ($ billion)

The US economy is well over twice the size of China’s.

GDP per Capita, 2010

Per capita, America’s economy is nearly 12 times China’s economy.

Source: International Monetary Fund

Source: International Monetary Fund


Is US Manufacturing Losing Ground to China?

manufacturing has lost more than 2.4 million jobs to China since 2001.

How many times have you seen that number? So many times that a lot of people think it is true. But the simple fact is that it’s not. This “job loss” calculation assumes that every product imported from China would have otherwise been made in the United States, which is clearly wrong—several decades wrong, in fact. Go back again to that TV example. It used to be made in Japan—and was an import. Look at the label now. It is likely made in China—and it is still an import. Much of what we import from China is replacing imports from other countries, not products we make in the United States today. Undoubtedly, some jobs have gone to China, but a jobs-impact study that ignores the facts and makes wildly exaggerated claims undermines its own credibility. And finally, is it true, as some choose to portray the issue, that US manufacturing is losing ground to China? While there have been estimates suggesting otherwise, the National Association of Manufacturers recently reaffirmed that America remains the world’s leader in manufacturing, with $1.7 trillion in goods produced in the 2009 recession year, the latest reliable data available. China was number two, at $1.5 trillion in manufacturing output. Yes, China’s output is growing quickly, as you’d expect from a rapidly industrializing economy of 1.3 billion people, but recessions aside, the United States makes more than ever before, we just do it with fewer people on the assembly line—and that reflects productivity here at home, not the rise of China. This is an issue where perceptions matter, however. Most Americans don’t look at the “tag” on airplanes often or check to see where the semiconductors in their electronic products were manufactured to see “made in USA.” Americans do often see that their clothes, plastic containers, or boxes of screws were “made in China,” or that their computer or iPod was “assembled in China.”

Based on US import statistics, China accounted for roughly one-third of all US consumer goods imports this past decade—the kinds of products you see on the shelf when you go into a convenience or electronics store and those consumer goods made up well over half of all US imports from China. The result is that US consumers have a misleading picture of America’s competitiveness based on reading the labels on the clothing, toys, or TVs they buy. There is a complimentary relationship between US manufacturers of components and manufacturing machinery that Chinese companies use to make products. Our two economies make different things well and benefit by trading with each other. The current economic environment clearly presents real challenges for US manufacturers, however. It is true that some US companies have closed because they could no longer compete, and it is true that US companies face daunting tasks competing internationally even with their distinct advantage in productivity. And when viewed from the perspective of jobs, productivity gains actually can mean that it takes fewer people to make the same product. As noted above, recessions aside, we make more than ever, but we do it with fewer people. In fact, US manufacturing jobs have been in a steady, decades-long decline that reflects these productivity gains—and far predates China’s entry into the global economy. Does that mean that the problems that do exist can be laid solely at China’s door? China may be a factor at the margins, but it is not the main challenge for the health of our manufacturing future. There is also a strong case as to whether this is really the right question in the first place for a serious discussion of an important policy issue. Manufacturing is a constantly changing landscape. Textile mills once were a dominant presence in New England. Then they shifted to the southern United States. And now many have moved offshore, just as consumer goods that used to be assembled in the Midwest now often are assembled elsewhere. Other industries, including those in the services sector, have emerged to take the places of those that have left.

US


An additional fact in understanding this issue is China’s vast disparity in population with the United States. As Chinese get more wealth and buy more, China’s manufacturing output inevitably will rise and surpass us. In short, comparing manufacturing output of a country with over a billion people with that of a country with 300 million will be an apples-to-oranges exercise as the Chinese people gain in wealth. Our focus needs to be on market access for US companies in China and on ensuring that China follows the accepted rules of global commerce. But as the facts clearly demonstrate, there is still highly competitive US-based manufacturing. Whether that continues to be the case in the coming decades depends more on steps taken at home to strengthen the competitiveness of US companies than it does on China. Deloitte has estimated that US manufacturers spend 18 percent more than their foreign competitors on non-production costs like tax, energy, and other expenses. Sensible policies on taxation, energy, education, infrastructure, trade, investment, and innovation will do far more to keep us competitive than futilely trying to isolate ourselves from China and the international economy. These are problems we can solve at home.

Manufacturing Output of Top 5 Manufacturing Countries, 2009 ($ billion)

The United States remains the world’s largest manufacturer.

Action Plan • Bolster the long-term competitiveness of

the US economy and US enterprises by adopting a comprehensive advanced manufacturing plan including smart policies on energy, tax, education, infrastructure, trade, investment, and innovation.

• Develop jobs by encouraging innovation

and growth by US companies in industries that will become global twenty-first century leaders, such as technology, energy, and related sectors.

Strengthen cost-effective programs to

help workers transition to growth sectors of the US economy to help them succeed in the international economy.

• Work to widen access for US

manufactured goods in China and for US companies to locate operations in China that otherwise would not be competitive in the Chinese market.

Source: United Nations Note: In constant 2005 dollars


Trade in Services: Opportunity for Growth

hough overshadowed by issues surrounding trade in manufactured goods, the dramatic expansion of trade and investment in

services between China and United States has benefited both economies substantially and will continue to do so for the foreseeable future. Though trade in manufactured goods is often viewed, rightly or wrongly, as benefiting one or the other country in terms of jobs and balance of payments impact, trade and investment in the services sector is overwhelmingly positive for both countries. The expanding market for service-based jobs is important to China’s ability to absorb the large numbers of young workers and college graduates entering the job market each year. For the United States, which is the world’s largest service economy, trade and investment in services with China translates directly into high-wage US jobs and increased profits from investments in China that lead to further investment and job creation in the United States. The more open the Chinese market for US service providers becomes, the more US services can be sold in China. In 2010, the United States exported more than $20.1 billion in services to China and imported just $9.7 billion, resulting in a surplus of $10.4 billion. And there is room for substantial growth. In a 2006 study, Oxford Economics estimated that if the outstanding impediments to services sector growth in China were fully removed, the bilateral services trade surplus with China would increase to around $60 billion by 2015, supplemented by extra income derived from US investments in China worth $7 billion—boosting US GDP in the short term by about 0.3 percent and creating up to 240,000 US services-sector jobs. Who are these services providers? They include major US banks and financial institutions, law firms, insurance companies, engineering firms and providers of tourism, business advisory, computer, express delivery, and medical and healthcare services, among others. Collectively, service industries account for 80 percent of private sector jobs in the United States. Increasingly, these companies are being allowed to set up operations

in China for sales in China. It is a major area of opportunity for US companies that includes additional jobs at their home base. The United States is the world’s largest exporter of services, and trade and investment in services with China translates directly into high-wage jobs and increased profits from investments there that lead to further investment and job creation in the United States. For instance, when a US engineering firm builds a power plant or manufacturing facility in China, much of the high-value conceptual design and engineering—which is considered a services export—is done in its American offices, and the detailed design might be developed in its offices in China. In addition, the firm will send project managers and support personnel from the United States to manage the project’s construction, without which the engineering might not be exported. The United States has a rapidly expanding services trade surplus with China; the more the Chinese market opens to US service providers, the more US services can be sold in China. These exports of services will contribute positively to the US

T Types of US Services Exports to China

Banking

Computer services

Engineering

Express delivery

Insurance

Legal services

Medical and healthcare services

Tourism

Action Plan

• Press for continued openings for US service companies to operate in the Chinese economy.


balance of payments. From a broader perspective, the expansion of China’s services infrastructure, especially in financial services, is essential to China’s integration into the global economy. For example, China’s ability to provide pension and healthcare insurance to its citizens, and its establishment of a modern capital market, will help China increase domestic demand, remove capital controls, and

move toward a market-driven exchange rate. The recent financial market turmoil led some in China to advocate for a suspension of the country’s financial system reforms. But China’s financial system is in need of basic transformations that have nothing to do with the global economic downturn—and could do much to help address some of the imbalances that are required to be part of the solution.

US Services Exports to China, 2000-10 ($ million)

US Services Imports from China, 2000-10 ($ million)

Source: US Bureau of Economic Analysis


US Companies in China: In it to Win…Market Share

usiness opportunities in China for US companies exploded during the last decade, with tremendous growth in both exports to

and local sales in China that have brought real value back to the United States. While exports to China are growing rapidly, there also is much to gain from US companies setting up operations in China for sale to the Chinese market of goods that they might not be able sell at all if they were made in the United States due to higher transportation costs and longer lead times for delivery. These sales not only benefit US companies and their investors but they also support jobs at home that are part of a company’s global operating system. First, some context. At a cumulative $18 billion China was the eighth-largest foreign destination of US manufacturing capital expenditures—what companies pay to acquire, expand, or upgrade their facilities—between 2000 and 2008. While US manufacturing capital expenditures in China grew 208 percent over this period, China accounted for a mere 4 percent of all such expenditures outside the United States. The Bureau of Economic Analysis, which tracks this data, indicates that about 86 percent of US subsidiaries in China are US wholly- or majority-owned facilities. When comparing capital expenditures in China by American manufacturers over the past decade to what they invested in American manufacturing, there isn’t much to compare. Aggregate capital expenditures spent by American multinationals in their US-based manufacturing facilities between 2000 and 2008 totaled $1.5 trillion—84 times what they spent on their China facilities over this period. Clearly, the presumed shift of the US production base to factories in China is greatly exaggerated. That doesn’t mean that the growth of US manufacturing operations in China is not important—it is, and mostly in a positive sense. What is driving manufacturing and other investment growth in China? Put simply, it’s a huge market that is rapidly growing in wealth. The

Chinese people want to buy things and are increasingly able to do so. These operations contribute to total product sales within the Chinese market by US companies’ China operations, which reached $87 billion in 2008—an increase of 431 percent since 2000. Services contributed another $12 billion in local sales by US companies’ China operations in 2008. Those overseas sales mean jobs here at home. Consider the view of Tim Solso, chairman and CEO of Cummins, an Indiana-based engine manufacturer:

“Our success in our global markets has a direct benefit to Indiana, where we are creating the kind of high-paying professional jobs that strengthen our community. Simply put, growth in international markets like India, China, and Brazil creates jobs in Indiana.”

Though some claim that US companies only produce goods in China for export to the United States, displacing manufacturing here at home, the facts say otherwise. Between 2000 and 2008, only 8 percent of total product sales by China-based US facilities were exported back to America. By contrast, the vast majority of sales of US companies in China—more than 70 percent—were within China’s local market (see chart on p. 19). Furthermore, there is enormous potential for growth—some estimates indicate that China’s annual consumption will increase more than six times by 2027 to as much as $10 trillion annually. In summary, all of the data indicates that little of US companies’ manufacturing in China is shipped back to the United States and instead is sold in the local Chinese market. In many cases, manufacturing in China to serve the local market makes the most business sense—as in the case of consumer goods, where shipping costs make manufacturing in the United States and sending to China unrealistic. In the end, US companies go to China to fight for market share in the world’s fastest-growing market.

B


Action Plan

Ensure the continued opening of China’s economy to accelerate the rapid growth of US exports to China and enhance the role of US companies selling goods and services in the Chinese market.

Further strengthen the leadership role of US companies in the international economy, especially in technologies and sectors that will become global twenty-first century leaders.

Support executive branch agencies and state governments in their efforts to promote US exports abroad and bring needed, job-creating investments into the United States.


Top 10 Foreign Destinations of US Manufacturing Capital Expenditures, 2000-08 ($ billion)

China was only the 8th largest destination of US manufacturing investments abroad over the last decade.

US Manufacturing Capital Expenditures in the United States and China, 2000-08 ($ billion)

The “offshoring” of US manufacturing to China is greatly overstated.




Local Product Sales by US Majority-Owned Affiliates in China, 2000-08 ($ billion)

US local product sales in China grew 431 percent between 2000 and 2008.

Destination of Product Sales by US Majority-Owned Affiliates in China, 2000-08

More than 70 percent of US majority-owned affiliate sales are to the China market; Less than 9 percent are exported to the United States.




The Changing East Asian Export Machine f US companies are primarily in China to produce goods for the local market, where do the large volumes of exports from Chinese-based

companies come from? The answer is largely that China has become the final point of assembly for companies headquartered in the industrialized East Asian economies—Japan, South Korea, Singapore, and Taiwan—as well as Hong Kong. For the United States, this means that imports that used to come from these other Asian economies now come from China, but overall, the share of imports from Asia remain relatively unchanged. This has the effect of exaggerating China’s role, unless one looks beyond the surface numbers. Industrialized East Asian companies used to manufacture and export directly from their home countries. Now, lower costs make it more economical for these companies to do the processing and assembly work in China. They typically produce the higher value-added component parts of their products at home and ship them to China to be assembled into final products, known as “processing trade.” The result has been an explosion in China’s imports of component parts from the rest of East Asia to meet ongoing market demand in the United States and other regions.

What does all this processing trade mean for US-China trade? A major shift in our source of imports, primarily, with more final products coming from China and fewer coming from the other countries in the region (see page 8 for more information). Put another way, a trade deficit for certain goods that used to be with Japan, Taiwan, or South Korea is now with China, reflecting this change of economic activity within Asia. Again, remember that TV example. For the United States, China’s economic development actually holds considerable potential and underscores the need to press for greater access to the large and growing Chinese market. For a discussion of how China’s domestic market benefits American companies, see page 11.

I

Action Plan Work at all levels to continue the opening

of China’s economy to US companies and exports in both the manufacturing and services sectors.

Cumulative Realized Foreign Direct Investment in China, 2005-08 ($ billion)

East Asian investment in China far exceeds US investment there, reflecting the shift in Asian export processing to China.

Source: PRC Ministry of Commerce


We Have Options When China Doesn’t Play Fair

espite the benefits of our commercial relationship with China, there are plenty of issues, too. What can the United States do

when China unfairly competes with or discriminates against American companies? When good-faith dialogue fails to resolve these kinds of issues, countries can take effective steps short of jumping to strident trade retaliation measures that often can be counter-productive. The United States has a variety of legally sound trade remedies and dispute-settlement mechanisms that it can use to level the playing field. US anti-dumping investigations are one proven method to deal with below-market pricing. Because China is a “non-market economy” under US trade rules, we use third-country, market-based pricing to assess tariff remedies on unfairly traded Chinese products—which also addresses any exchange rate distortions that may be present. In addition, membership in the World Trade Organization provides countries with recourse when they believe other trading partners have treated them unfairly. These cases can be very effective when well-defined, winnable, and supported by industry. Legal precedents set by these cases benefit US companies in the sectors covered by the cases and more broadly. As of March 2011, the United States has taken eleven cases to the WTO against China and has won three; four others were resolved by China before WTO action was required; and four are still pending. China so far has a decent track record of implementing WTO decisions. To date, China has lost three WTO dispute cases and appears to have complied with two that have reached the implementation phase: the IPR enforcement case and an earlier case in which the WTO ruled that China placed discriminatory taxes on imports of foreign auto parts. In the final case dealing with market access for movies, music and printed books and magazines, China appears to have made only some of the legal changes required. The United States is using WTO processes to ensure implementation of the remaining issues, dealing with the release of films in Chinese movie theaters and the regulation of DVDs, CDs, books, and magazines.

China has similarly implemented commitments it has made during dispute consultations on issues that never resulted in a formal case. For example, the Office of the US Trade Representative (USTR) reported in the 2010 National Trade Estimate that it has not received complaints about changes China made to its financial news services industry regulatory regime since June 2009, when China implemented a November 13, 2008 US-China memorandum of understanding on the subject. Success in these cases demonstrates the effectiveness of the rules-based approach to engaging PRC leadership on international trade issues. China is also getting more comfortable filing its own cases at the WTO. This is also a positive step—the use of neutral, third-party dispute settlement mechanisms is preferable to seeing China take retaliatory trade actions outside of the WTO.

D

Action Plan

When direct negotiations fail to resolve problems, the United States should use legally sound trade remedies, such as anti-dumping investigations, and dispute-settlement mechanisms, such as WTO cases, when well-defined, winnable, and supported by industry.

USCBC Members’ Top 10 Commercial Issues in China 1. Human resources: Talent recruitment

and retention (tie) 1. Administrative licensing, business and

product approvals (tie) 1. Competition with state-owned

enterprises (tie) 4. Intellectual property rights enforcement 5. Cost increases 6. Market access in services 7. Transparency 8. Protectionism risks in China 9. Government procurement 10. Standards and conformity assessment For USCBC’s full report on company priorities in China, see www.uschina.org/public/ documents/2010/membership_survey.pdf


US Companies: A Positive Influence in China

merican companies do not go to China to be role models or missionaries of change, but by their very presence they do offer a

model for Chinese enterprises that are new to the world of modern global commerce. This is particularly true on issues related to food and product safety, where US companies have the experience of operating under effective safety regimes. In fact, toy recalls have dramatically declined since 2008 according to the Consumer Product Safety Commission, which has been attributed not just to regulation, but also to the safety requirements imposed by major US companies. By simply being there, American companies and employees bring new ideas, new ways of doing things, and new experiences, and the best of a company’s human resource practices and proper environmental practices. They bring day-to-day, working-level, unplanned, uncontrolled but pervasive examples of better ways to do things. It is not always perfect, and there are always anecdotes to the contrary, but the American company presence in China has been overwhelmingly positive. In general, the experiences of USCBC member companies have shown that the more China becomes integrated into the international economy, the more likely China will continue to move along a path of reform and development. That is good for the Chinese people and good for us. We should support a greater presence by US companies in China for more than the benefit that

flows to the US economy. They also help bring improvements to Chinese workplace labor and environmental practices and improve consumer safety in both countries.

AAction Plan Support rule-of-law programs within

China, such as the US-China Legal Cooperation Fund (www.uschinalegalcoop.org).

Continue top-level and working-level government programs to increase China’s food and product safety capabilities.

Encourage the PRC government to view US companies as part of the solution on food and product safety issues through education, training, and best practices programs.

Promote public-private partnerships such as the Energy Cooperation Program and Healthcare Cooperation program, administered by the Trade and Development Agency, to encourage adoption of sensible policies on key areas of reform in China.

Allow US companies to test products sold in China for safety and compliance, not just those destined for export, to support China’s efforts to build consumer confidence.


Staying Atop the Global Competitive Pyramid

aintaining the record of the United States as a strong manufacturing and services economy won’t be easy. The costs of

energy can put a significant strain on even the healthiest US manufacturers. Though energy costs have eased recently, long-term trends indicate that they will be a lasting issue. The extra burdens in the areas of pensions and healthcare carried by US companies are well documented. The need to bolster the education system to maintain the technical superiority of US workers is also no secret, as is the necessity to strengthen the country’s transportation infrastructure. Smart trade and investment policies are necessary to foster job creation here at home. Incentives for innovation in new and challenging areas are also important to maintain international leadership. The future will belong to the country whose companies invent and develop the next great breakthrough. Where will the great breakthroughs in environmental technology, energy efficiency, and safe extraction of minerals and natural gas come from? Who will develop the springboard for nanotechnology, build the more advanced robotics, or gain the upper hand in creating more sophisticated biotechnology products? How can we capitalize and expand upon the US lead in computer technologies and information processing, as well as build upon the US edge in aerospace manufacturing to dominate the space exploration industries of the future? These are not China problems, however. They are America’s problems. A smart China policy in the coming decade will continue to focus on opening markets, ensuring transparency, and building rule of law. A smart policy for America will focus on getting our own house in order so that US companies can continue to be great. Instead of misguided policies based not on the facts but the fears of trade, US policymakers need to pursue well-thought out solutions that take into account the complexities of the global economy.

To this end, the US government should increase resources for US trade agencies, such as the Office of the US Trade Representative and the International Trade Administration. Doing so would increase the ability of US officials to pursue US rights under global trade agreements and through bilateral mechanisms such as the US-China Joint Commission on Commerce and Trade (JCCT). It would also expand the ability of US Foreign Commercial Service officers to help US companies understand the Chinese market and build connections with Chinese business partners. The best way to achieve US objectives on lingering commercial problems in China is through a combination of high-level, comprehensive engagement such as the Strategic and Economic Dialogue; good-faith negotiation on specific issues through existing vehicles such as the JCCT; and, when negotiations fail, the use of rules-based trade tools such as WTO cases when they are well-defined, supported by industry, and winnable. The federal government should also better coordinate with state and local governments to support their efforts to boost job creation through exports abroad and foreign investment in the United States. Congress should seek input from governors’ and mayors’ offices that are on the front lines of dealing with trade, investment, and employment issues in their home states. American workers need the skills to keep pace with this rapidly changing workplace environment. We should help them access training programs or enroll in vocational schools to improve or develop skills that are needed in the industries that will lead our economy in the future. When American workers lose their jobs—because of trade, technology, or any other reason—we should focus on retraining them to hold jobs in those growth industries as well. Though there are certainly challenges posed by the actions of our global competitors, many of the answers to maintaining America’s global economic leadership are right here at home.

M

Documents

CHINA AND THE US ECONOMY · • The US economy is far larger than China’s. In the past decade alone, the US economy grew by the equivalent of the entire Chinese economy. China is