The United States and China Trade Places as Number One Exporter of Manufactures

There is increasingly frequent discussion of the 20th century as the American century and the 21st as the Asian, with China at the center.  This shift would encompass the rise of China to become the second global superpower with the United States, and perhaps the number one economic power.  A leading indicator, or harbinger, of this transformation, with broad implications for military as well as economic power relationships, could be trade in manufactures during the first decade of the new century, when China rose rapidly to surpass the United States as the number one exporting nation.  In 2000, U.S. global exports of manufactures were three times larger than Chinese, while by 2010 Chinese exports were almost 50 percent larger than U. S. exports.

During the decade, the composition of Chinese manufactures also shifted away from labor- to investment- and technology-intensive industries.  The share of total Chinese exports for non-electrical machinery and equipment was up from 14 to 21 percent during the decade, while the share for textiles and apparel was down from 23 to 14 percent.  Most disturbing were the growing trade imbalances in the sector.  The Chinese surplus rose from $45 billion in 2000 to $201 billion in 2005 to $534 billion in 2010, while the persistently large U.S. deficit rose by $87 billion in 2010 to $416 billion, for a cumulative $4.7 trillion deficit over the decade.  In terms of global exports of manufactures, the U.S. share declined from 19 percent in 2000 to 13 percent in 2010, while the Chinese share increased from 7 percent to 20 percent.  This is the bottom line trading of places during the decade.

The outlook, moreover, is for the Chinese export lead and the trade imbalances to grow further in 2011, based on the gathering momentum in 2010.  Global exports of manufactures rebounded in 2010 from the recession-driven declines of 2009, but while U.S. exports were up by 19 percent, Chinese exports surged by 31 percent.  The ratio of Chinese to U.S. exports rose from 139 in the second half of 2009 to 157 in the second half of 2010, and is on track for Chinese exports to double U.S. exports in two to three years.  The trade imbalances also grew at an accelerating pace during 2010, and the U.S. deficit in 2011 could approach $500 billion.

These are the basic facts about the changing of places for trade in manufactures over the past decade, which pose a serious challenge to the United States in terms of export competitiveness and technological leadership.  The manufacturing sector plays a central role in trade and international economic relationships more broadly.  It is the dominant sector of trade, accounting for 95 percent of Chinese and 80 percent of U.S. merchandise exports.  In terms of national economic strategy, manufacturing industry is at the center of technological innovation, research and development, and, especially for the United States and China, defense modernization.  Two-thirds of U.S. private sector research and development and patents come from the manufacturing sector.  Trade in manufactures is also highly price-sensitive and therefore the most heavily impacted by exchange rates, a current area of U.S.-China policy conflict.

The problem is that Chinese economic strategy throughout the decade has centered on the rapid, export-led development of high technology industries so as to modernize the Chinese economy toward parity with the United States, including for defense industries, which has led to a highly unbalanced economy.  Personal consumption in China is only 35 percent of GDP, compared with 60 percent in India and 70 percent in the United States, while investment, heavily export-oriented, is about 50 percent.  During 2010, this imbalance increased, with personal consumption up by less than the 10 percent growth in GDP, while export-oriented industrial production rose by 13 percent.

The principal policy instrument for Chinese export-led growth has been a greatly undervalued exchange rate, estimated to be 20-40 percent below a market-based rate, and constantly growing because a newly industrializing nation, such as China, with high levels of technology-laden investment in export industries, achieves higher annual productivity growth compared with mature industrialized trading partners.  Unless the exchange rate is steadily revalued, the trade surplus in price-sensitive manufactures grows ever larger, which is what has happened for China over the past decade.

The United States needs a comprehensive and forceful policy response to this mercantilist Chinese growth strategy, so as to reduce the trade deficit in manufactures and stem or reverse the declining U.S. share of global exports.  Over the medium term, changes in domestic policies to strengthen U.S. export competitiveness will be the most important.  More rigorous enforcement of trade policy obligations by China and others is another priority, including for protection of intellectual property and government procurement practices.

The most immediate objective, however, should be a prompt phase-out of the undervalued Chinese currency, which is being pursued in clear violation of IMF and WTO obligations.  IMF Article IV obligates members not to manipulate their currencies to gain an unfair competitive advantage in trade through protracted, large-scale purchases of foreign exchange by the central bank.  The Chinese Central Bank has made more than $2 trillion of such purchases over the past eight years.

WTO GATT Article XV states that members should not take exchange rate actions that frustrate the intent of the agreement for reciprocal and mutually advantageous opening of markets.  In 2010, U.S. manufactured imports from China were $358 billion, six times larger than the $59 billion of U.S. exports to China, for a deficit of $299 billion.  Hardly reciprocal.

For a number of years, the United States has pursued bilateral diplomacy with China over its undervalued currency, with limited positive results on trade account.  It is time for the United States, together with like-minded trading partners, to lodge formal complaints in the IMF and the WTO against Chinese currency manipulation to gain an unfair advantage in trade, with principal impact on the manufacturing sector.

[1] Senior Advisor for International Trade and Finance, Manufacturers Alliance/MAPI.  This article presents highlights from the full report, “The United States and China Trade Places:  Trade in Manufactures During the First Decade of the 21st Century and How the United States Should Respond” (MAPI, March). Comments are welcome to EHPreeg@mapi.net.