Study: Understanding the US-China Trade Relationship

By Oxford Economics for US-China Business Council

As the recent presidential campaign focused renewed attention on the condition of the US economy, many Americans have been told that international trade—and more specifically, China’s trade relationship with the United States—is bad for workers and hurts US growth.

The US-China trade relationship is far more nuanced than the headlines suggest, however, and the trade deficit doesn’t tell the whole story.

Today, the US-China trade relationship actually supports roughly 2.6 million jobs in the United States across a range of industries, including jobs that Chinese companies have created in America. And as the Chinese middle class continues its rapid expansion over the next decade (the number of Chinese middle-class consumers will exceed the entire population of the United States by 2026), US companies face significant opportunities to tap into a new and lucrative customer base that can further boost employment and economic growth. Economic data show that nations trading closely with China outperform nations with less integrated trade ties, and we expect this trend to continue.

The pace and scope of China’s growth over the past three decades is unprecedented. In less than one generation, a population larger than that of the United States rose from poverty, creating a middle class of more than 300 million people who devour Hollywood movies, enthusiastically shop online, and lead the world in the use of mobile web and e-commerce applications. China is now crisscrossed by bullet trains connecting massive industrial complexes that produce cars, TVs, chemicals, and electronics sold to consumers in the world’s second-largest economy and buyers around the world.

Americans don’t always see China’s growth as positive, particularly those in the manufacturing sector. It is easy to tally the dislocation that foreign competitors, including many from China, have caused among US manufacturers. And indeed, the US trade deficit with China is still significant at $334 billion, or 1.9 percent of GDP.

But this obscures the fact that US exporters have been increasing what they sell to China, proving it to be a strong market for a wide range of sectors such as agriculture, chemicals, and transport equipment. China has become the third-largest purchaser of US-made products and services (after Mexico and Canada, our closest neighbors with which the US has a free trade agreement), buying $165 billion in goods and services in 2015 alone. These sales will increase as China’s economy matures and Chinese wages continue to rise. By 2026, we expect the United States to be exporting $369 billion in goods and services to China and by 2030 this figure will reach $525 billion, or 10 percent of total US exports, reflecting the enormous size of China’s market and the faster pace in the projected growth in its cohort of middle class consumers.

US multinational companies and entrepreneurs have been major contributors to the development of China’s economy. Jeep and General Motors were among the first to set up automobile manufacturing centers in China, for example, gaining an early foothold in what is now the world’s largest automobile market.

In the wake of these first movers, the global supply chain, with its hub in Asia, developed rapidly in the 2000s. Companies such as Apple used US know-how to develop products to be assembled in China using components manufactured around the world and then sold in markets around the globe, including the United States. Doing so improved the competitiveness and profitability of US businesses, which are today among the world’s largest in dynamic sectors, such as automotive and technology. US businesses’ income from direct investments around the world has tripled since 2000 to 2.4 percent of GDP, with income from China making an important contribution. Naturally, as large businesses earn more overseas income, they can spend more with smaller suppliers and subcontractors here at home.

As the Chinese economy transitions into the modern age, there is ample reason to believe US exports can grow even more rapidly, and US firms can harvest significant revenues from their investments.

Our analysis shows that the assumptions regularly cited in the media about impact of the US trade deficit with China are frequently overstated. This is partly because the contribution of US services exports to China is often overlooked when tallying the balance of trade, but also because of the foreign-made content in Chinese exports. When these points are factored in, the US deficit with China falls from 2 percent to just 0.8 percent of US GDP—less than the US trade deficit with the European Union.

While it’s true that moving manufacturing labor to China has led to fewer such jobs in the United States, the US-China trade relationship also supports roughly 2.6 million jobs in the United States across a range of industries.

In fact, the commercial relationship with China benefits the US economy in several ways:

• China is now one of the United States’ major export markets, supporting millions of jobs—and its importance will only continue to grow.
• Chinese investment in the United States supports US jobs and overall economic growth. Chinese investments also keep US interest rates low, providing further stimulus for businesses and consumers.
• China’s role in the global supply chain improves the competitiveness of US business and lowers US inflation. Imports from China (and other countries) can displace jobs in the United States. It is also true that imports can lower costs for US manufacturers and keep them competitive in international markets, as well as benefit American households by reducing the cost of living and making more money available to meet other spending needs.

While job losses in some sectors can be associated with rising global trade, American workers remain the most competitive in the world. The challenge for policymakers is to create an effective mechanism for retraining, so workers in industries that are disappearing can gain new skills suitable for rising sectors.

Princeton economist Alan Blinder, a former vice-chair of the Federal Reserve and an expert on global trade, argues that the cost of trade is outweighed by its value—and that an increasingly intertwined world economy is not just beneficial, but inevitable. No policy, he says, can make “the changes brought about by changing international trade patterns painless to everybody. But that’s an impossible goal. Change hurts people always, but it also helps people. And holding back the tide of trade is analogous to holding back the tide of technology.” [1] The challenge for policymakers is to develop programs to effectively support displaced workers, while ensuring the United States remains globally competitive and positioned to realize the net gains from trade with China and the rest of the world. Better communication of the role of trade in America’s economic health, household incomes, and employment is also a necessity.

Read the full report here.