By DAVID MICHAEL (China Daily)
Updated: 2007-09-13 07:35

A widening trade imbalance between China and the United States has led to calls for action from Washington to Wall Street, but before the US plunges into a trade war with China, its business and political leaders should look beyond the trade deficit numbers.

The US-China trade deficit exceeded $232.5 billion in fiscal 2006, according to US government figures. This represents a real economic imbalance, but the fact is that neither Chinese companies nor the Chinese government are primarily responsible.

Foreign companies drive the majority of China's exports, while many of China's domestic markets are relatively open to foreign products and brands. So the trade deficit reflects the complicated reality of globalization.

It also reflects the decisions of many non-Chinese companies, which on balance are made to benefit those companies and their customers. Consider this: Nearly 60 percent of all China's exports are driven by non-Chinese companies seeking to take advantage of the country's low-cost manufacturing and state-of-the art infrastructure.

Consumers in the US buy these products every day at Wal-Mart, Costco, Circuit City, Macy's, and other leading retailers. Many of these products display Western brand names, with Western designs and quality standards, but they are made in China.

Indeed, to keep the sourcing stream flowing, US and other international companies are investing $1 billion a week to further expand their China operations.

By contrast, China has yet to produce a large number of purely Chinese-owned export powerhouses. This is quite different from South Korea or Japan, where local companies dominate the export landscape. In China, foreign companies drive the export game.

How about China's own market? Is China importing much from abroad? While it may not be importing enough to erase the trade deficit, China is buying a lot more from the US than it did just a short while ago, and it is likely to buy significantly more in the future as its booming economy grows.

Since China joined the World Trade Organization (WTO) in 2001, for instance, US exports to China have increased by 190 percent, making it America's fourth-largest export market, according to the Office of the US Trade Representative (and if US exports to Hong Kong are included, then China is America's third-largest export market).

The rate of increase in US sales to China has been 12 times higher than the growth of American exports to other countries during the same period, according to the US Commerce Department.

Indeed, Chinese consumers like foreign brands. And as incomes continue to rise, more Chinese consumers will seek foreign-made goods. US and other non-domestic brands already dominate many sectors in China, including cars, mobile phones, computer printers, high-end televisions, commercial aircraft, and virtually all high-end medical equipment.

The reasons why US and other foreign products do so well in China are many.

One of the most important is that the Chinese market is generally quite open to their products, far more than the Japanese and South Korean markets historically have been. Foreign brands play a large role in the daily lives of most Chinese people.

The main exceptions at this time are in the service sectors, such as financial, communications, media, and entertainment. This is an area where US trade negotiators should legitimately focus their attention, and where an opening of Chinese markets would benefit the US economy.

Another promising area is travel. Chinese consumers are eager to visit the US and to spend money there. American policy should evolve to better capture this opportunity.

It is important to keep the big picture in mind. US policymakers should be advocating the benefits of greater trade to both sides, rather than seeking to erect barriers. By doing so they might also gain the leverage needed to convince China to make some tough economic and social choices.

For instance, Chinese regulators might be convinced that it is in their own interest to crack down on copyright and foreign patent violations and improve intellectual property protections, issues that greatly concern US companies.

The US also might be in a better position to encourage China to move forward with meaningful environmental protection. This would include implementing much stronger environmental emissions standards, investing in new refineries capable of processing cleaner fuels, and mandating that domestic Chinese producers comply with globally accepted pollution standards.

China also needs to confront other problems. Despite its emergence as a global economic powerhouse, the country is still home to 18 percent of the world's poor, with 150 million people subsisting on less than $1 per day.

But China's rapid economic development is lifting tens of millions of people out of poverty, according to the World Bank. That is something Americans should be happy about.

They should also be happy that Chinese people have an overall favorable opinion of the US. A 2006 Pew poll of global attitudes, for example, revealed that Chinese peoples' attitudes toward America are far more favorable than the opinions held by some of its more traditional allies.

In considering the US-China trade relationship, Americans should reflect on the following: The past decade of rising trade with China has helped tens of millions of people in China rise out of poverty, has helped fuel generally favorable attitudes toward Americans, and has helped provide important export and investment markets for US companies, with the potential for substantially more growth in the future. Is there some other plausible scenario more positive than that?

The US and China each bring to the table distinct advantages and disadvantages. China's main advantages are its low-cost labor pool, its impressive infrastructure that enables companies to gain access to this labor, and its pro-investment policies. Neither currency adjustments nor trade barriers will change this situation.

Indeed, Oxford Analytics has recently reported that even a 25 percent appreciation in China's currency would bring about only a marginal change in the trade deficit.

Asking China to turn back the clock on its growing role in the global economy is not the answer. Indeed, what will become really crucial in the years ahead will be the task of working with China on issues of vital common interest.

The decisions that China makes about growth, environmental and energy policies, and global warming will soon be the most important questions for all of us. The US would be well served to ensure that these issues are prominent in its overall China relationship.

The author is a senior vice-president and director with the Boston Consulting Group's Beijing office

(China Daily 09/13/2007 page11)