The Rushford Report Archives

The Chicago Fed: Why the U.S.

benefits from trade with China


November, 2003: Publius

By Greg Rushford

Published in the Rushford Report


China has become the “new Japan .” In Illinois and other important 2004 battleground states in the industrial heartland, manufacturers are fearful that Americans can no longer compete with low-wage China . Echoing the fears, the newspapers are full of cries for high tariffs and subsidies. There are precious few thoughtful analyses that explain why the fears — just as they were when aimed at Japan in the 1980s — are overstated. One well-researched analysis that was released last month by the Federal Reserve Bank of Chicago , however, clearly illustrates the mutual benefits of international trade between the United States and China . The three-page study — authored by William Testa, Jay Liao, and Alexi Zelengev — deserves to be read carefully by readers who wish to think this important issue through for themselves. Key excerpts follow:

 

Chicago Fed Letter:

Midwest manufacturing and trade with China

            As U.S. imports from China have climbed in recent years, some domestic manufacturers have voiced concerns about competing against low-cost Chinese goods in the U.S. market. At the same time, however, U.S. households benefit from falling prices for imported goods; firms benefit from falling prices on intermediate components and parts; and U.S.-domiciled multinationals benefit from selling to and investing in the burgeoning Chinese market.

            Both exports and imports have grown rapidly, but china’s imports into the U.S. have easily outpaced U.S. exports to China . Since 1989, the nominal dollar value of U.S. imports from China has multiplied more than eightfold, reaching $125 billion in 2002, allowing China to surpass Japan for the first time. China ’s manufactured exports to the U.S. represented 10.8 percent of manufactured imports for 2002.

            What has been the impact of rising imports on domestic U.S. manufacturing production? We sometimes think of rising imports as displacing production at home. Rather than displacing domestic production, however, rising imports may serve rising demand for some types of goods in the home country. So too, imports can consist of intermediate components that become embodied in domestic production of a final good. To the extent that such components are most cheaply sourced overseas, they may help keep domestic production competitive for the final good in the domestic market, or even allow domestic production to export the final good to third country markets.

            For 2001, we estimate China ’s manufactured imports to be 2.7% of the U.S. domestic market — defined as domestic production plus imports — up from .4% in 1989.

            There are several reasons to believe that the growth in import penetration overstates the potential displacement of U.S. manufacturing production by imports from China . This is especially so when we consider that, owing to China ’s economic growth, exports from the U.S. to China have also expanded, lifting domestic production beyond what it otherwise would have been. Exports to China grew from 0.5% of U.S. manufacturing output in 1989 to 1.5% by 2002. In addition, low-cost imports from China have restrained price increases and raised the real income of U.S. households, allowing them to purchase more goods - both domestic and foreign. An additional factor that  is not easy to quantify is the extent to which China ’s exports to the U.S. are substituting for exports that would otherwise have entered the U.S. market from alternative low-cost countries.

            U.S. manufacturing output growth has been weak, and year-over-year job growth in manufacturing has been negative for over three years. However, the bulk of the current U.S. manufacturing weakness cannot be attributed to rising imports and outsourcing. The overhang of excess capital goods investment and other production capacity continues to weigh on the pace of orders for new manufactured goods, as does the shallow U.S. economic recovery from the 2001 downturn. Moreover, flagging economic growth in developed countries in Asia , South America , and Europe continues to hold back U.S. exports. Most importantly, over the longer term, manufacturing jobs have grown at a slower pace than jobs in services, largely because productivity gains in manufacturing have exceeded those in most service industries.

            We find that the penetration  of Midwest manufacturing by Chinese production remains smaller than at the national level. For 2001, we estimate Chinese trade penetration of the Midwest to be 2.3% versus 2.7% for the whole domestic U.S. market. These average levels of import penetration put into perspective that China remains, on average, a small-to-moderate player in many U.S. (and Midwest ) markets for manufactured goods.

            However, China has become a dominant player in individual product categories, especially those that are very labor intensive. In particular, our estimates for 2002 suggest a Chinese market share for the U.S. of over one-half for certain categories of dolls and stuffed toys, fur and leather apparel, and women’s handbags.

            These are not product categories in which the Midwest specializes.

            With its robust development and rapid growth, China has become a growing market for U.S. (and Midwest ) exports. But while U.S. exports to China have grown rapidly since 1988, they as yet comprise only 1.5% of the value of U.S. manufacturing production. Some regions, such as the Far West , have parlayed their concentration in computing equipment and other electronics up to a 3.6% production share. However, the Midwest exports only .6% of its manufacturing production to China .

            China ’s rapid economic growth has benefited U.S. consumers. And, for some U.S. companies, the opening up of the Chinese market represents an opportunity for growth in exports of U.S. manufacturing goods and services, or for investment and production in China . At the same time, the growth in imports from China is challenging domestic producers to lower costs to remain competitive.

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