Close on the heels of last week's news that the U.S. trade deficit in 2005 set a new all-time high of $725.8 billion comes a stern new report on U.S.-China trade relations from the United States Trade Representative.
The connection between the two is more than just timely. The U.S. trade deficit with China in 2005 was $201.6 billion, also a record. The new numbers will without doubt further inflame protectionist tendencies in Congress, and the USTR report is likely an attempt to fend off any such action.
The Bush administration is in a bit of a pickle. Its own commitment to free trade has helped fuel the exploding deficit, but it can't ignore the growing political heat radiating from all things China-related. But instead of focusing its energy on structural reforms in the United States that might lead to a more productive economy, the White House is taking the easy way out: China's been a bad boy, is the gist of the report, and if it doesn't change its way soon, there will be hell to pay.
"Absent tangible evidence that China is acting responsibly with respect to these issues, popular support for a twenty-five-year-old trade policy of constructive engagment with China could be in danger, with potentially damaging consequences for both countries."
The report lists China's failure to protect intellectual property, government subsidies of state-owned enterprises, structural blocks on foreign imports, and artificially restricted currency as reasons for the big numbers. And there's some truth to every one of those critiques. But even if China made substantial progress on every single one of the U.S. complaints, there are a fair number of economists who believe that there still wouldn't be much of an impact on the overall numbers.
U.S. exports to China have been growing at a healthy clip, by 20 percent a year the last couple of years. But U.S. appetite for Chinese-made goods has been growing even faster. And the reason for that has less to do with structural problems in China than with the simple fact that China is now the manufacturing headquarters of the world.
And that's something that the rest of the world has made happen. In an interview with BusinessWeek last month, China specialist Nicholas Lardy noted that 55 percent of Chinese exports are manufactured by foreign-owned or joint-venture companies. A hefty percentage of those exports, as acknowledged by the USTR report, did not replace U.S. domestic production, but instead merely shifted the overall distribution of exports away from other nations, as documented in the New York Times last week. Korea and Japan used to export directly to the United States; now they export parts to China, assemble them there, and then move the finished goods to the U.S. The USTR report notes that the entire Asia-Pacific share of the U.S. trade deficit -- including China -- has actually fallen significantly, from 57 percent to 43 percent, over the last six years. Meanwhile, China's not the only nation the U.S. is setting records with. As the Seattle Times reports, America's trade deficits in 2005 also hit all-time highs with Japan, Europe, OPEC, Canada, Mexico and South and Central America.
That alone should be enough to convince intellectually honest China bashers that the problems with the U.S. deficit cannot be solely pinned on wily communist bureaucrats who are keeping a blind eye to piracy while at the same time blocking the U.S. from fair competition in Chinese domestic markets. Sure, tough enforcement of I.P. laws and Chinese currency revaluation would help a little (even if all they did was slow the rise of the trade gap), but neither measure is likely to make a major dent.
Free trader, heal thyself.