Bruce Bartlett

The rapidly rising U.S. trade deficit with China is quickly becoming a political issue. Many members of Congress are warning that China needs to take action, such as raising its exchange rate, to deal with this problem before it leads to protectionist legislation. A closer examination of the Chinese trade problem, however, suggests that there is less here than meets the eye.

In a very short time, Chinese goods have become the largest component of America's trade deficit. From virtually nothing in the 1980s, our trade deficit with China jumped to $103 billion last year. We exported just $22 billion worth of goods to China while importing $125 billion. By contrast, our trade deficit with Japan last year was 30 percent lower than that with China.

It is important to put these numbers in perspective. Although China represented 22 percent of the U.S. trade deficit last year, that is down from 27.5 percent in 1997. Also, China runs a trade deficit with the rest of the world. In 2001, China's total surplus was $33 billion while its surplus with the United States was $83 billion. Among those countries running surpluses with China are Taiwan ($25 billion) and Korea ($11 billion).

This suggests that China is not running a trade policy aimed at subsidizing exports or keeping out imports; otherwise, it would be running a surplus with everyone. As a recent Federal Reserve Bank of Cleveland study concluded, "China has the largest surplus of any country in its bilateral trade with the United States, not because its market is closed but largely because it has emerged as a major global production base for labor-intensive manufactured goods."

The Fed study goes on to note that most of our imports from China have not displaced domestic manufacturing but rather have displaced imports from other Asian countries. For example, it notes that our imports of footwear from China previously came from Taiwan and Korea, and many of the toys and games we import from China were imported from Hong Kong in the past.

Further evidence that Chinese goods are not replacing domestic production comes from the foreign direct investment data published by the Commerce Department. The latest figures published in the July Survey of Current Business show that China is far from the magnet for U.S. investment that many imagine it to be. At the end of 2002, U.S. companies had just $10.3 billion invested in China, a decline of $1 billion over the year before. By contrast, American companies had $255 billion invested in Britain, $152 billion in Canada and $145 billion in the Netherlands. Looking just at foreign direct investment in 2002, 55 percent went to Europe, and only 26 percent to all of Asia.

Bruce Bartlett

Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.

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