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.
