China’s role in boosting US growth

by Michael Zielenziger

As the Trump administration prepares to take office next Friday, it seems likely to take a harder line against some of America’s key trading partners, especially China, which it accuses of “stealing jobs” from American workers. A new regime of trade tariffs or import barriers against China would represent a major tactical reversal for a Republican party that has traditionally supported the principle of free trade, but Donald Trump rode the support of embattled working-class voters in states like Wisconsin, Michigan, and Pennsylvania all the way to the White House by claiming China was systematically attacking US competitiveness.

clip_image002Yes, the United States does run an annual trade deficit of about $365 billion with China, and low-wage Chinese labor has caused some US factories to close. But these headline trade figures obscure some of the realities about the trading relationship between the world’s two largest economies. We at Oxford Economics have just published a report with the US China Business Council that demonstrates that trade with China supported 2.6 million jobs and $216 billion of GDP in 2015 alone when exports and investments are combined.

Once America’s 11th-largest export market (in 2000), China is now the third-largest destination for American goods and services after our neighbors Mexico and Canada. US exports to China directly and indirectly supported 1.8 million new jobs and $165 billion in GDP in 2015. This represented 7.3 percent of all US exports. By 2030, we estimate that fully 10% of total US exports, or about $525 billion, will be ticketed to China.

To better assess our trade relationship with China, it is important to put that trade deficit number in a larger context. Though our deficit with China represents about 1.9% of GDP, many of the goods we import from China contain a large element of US-made subassemblies, components, and intellectual property. If you strip out the value-added foreign components of Chinese exports, the trade deficit with China falls by nearly half, to about 1 percent of GDP. This is broadly in line with the US trade deficit with the European Union—and no one in Washington is talking about launching a trade war with Italy or France.

The US also enjoys a trade surplus with China when it comes to services. Including this service component lowers the deficit to just 0.8 percent of GDP—and it is in the service sector of the economy where the US is poised for accelerating growth in the coming decade, since we project huge growth in China’s middle class. By 2025, we expect 160 million Chinese consumers to have incomes exceeding US $35,000—and these are precisely the consumers that are likely to seek out US services and goods, like Hollywood movies, iPhones, financial services, and burgers made from US beef.

It is also important to realize that our trading relationship with China has helped suppress inflation in the U.S. At an aggregate level, US consumer prices are 1 percent—1.5 percent lower because of cheaper Chinese imports. The typical US household earned about $56,500 in 2015; trade with China therefore reduced its spending by up to $850 last year.

Finally, our data shows that countries that engage and trade with China do better, economically, than countries that don’t. China has contributed more to global growth over the past 15 years than the Eurozone and US combined. Despite the 2008 recession, the US has experienced stronger growth than most other developed economies since 2000—a compound annual growth rate of 1.8 percent —and at least some of this growth is because of US trade with China. And Chinese investments in the US are destined to rise, as Chinese companies, like British and Japanese companies before them, hire US workers and open US-based businesses in fields ranging from auto parts to information technology.

This sort of trade helps boost US productivity—which is the real key to growing America’s long-term future prosperity.

You can read the full report here.

Michael Zielenziger is a Managing Editor of Thought Leadership. He has worked on a range of topics including the impacts of globalization, workforce issues, the interactions of media and technology, the changing US healthcare environment, and the prospects for emerging markets, with a special focus on Asia.