By Laura D'Andrea Tyson
America's trade deficit with China is emerging as an issue in the Presidential campaign. The Bush Administration has slapped unilateral quotas on imports of Chinese textile products, with the threat of more to come in other sectors. Congress is buzzing with lobbying efforts and legislative initiatives to address the specters of unfair trading practices and currency manipulation attributed to China. And China has become the target for half of all of the antidumping cases brought by U.S. companies. Protectionist sentiment is not surprising in an election year featuring a jobless economic recovery and close votes in swing states with large labor constituencies. But there is no economic justification for protectionism. Even protectionist rhetoric risks destabilizing the global capital flows on which the U.S. expansion depends. China does indeed have a huge and ballooning trade surplus with the U.S., but it runs sizable deficits with other countries, and its overall trade surplus is small and shrinking. More important, China has flung open its doors to foreign direct investment. Last year it was the second-largest target for such flows. And the International Monetary Fund recently said there is no evidence that the Chinese currency is substantially undervalued. Indeed, if the currency were floated, it might well decline as Chinese convert their domestic currency holdings into dollars.
CHINA IS A DAUNTING export machine. Its exports grew eightfold between 1990 and 2003. It is a source of both labor-intensive traditional products like textiles, toys and shoes, and an exporter of technology-intensive products as well.
While American textile workers may be getting hit, China's export surge overall is not displacing American workers but alternative suppliers around the world. Because labor is four times more expensive in Mexico than in China, China has overtaken Mexico as America's second-largest trading partner. China's exports in the electronics industry have driven out similar exports from competing higher-cost Asian economies. The real victims of China's formidable production cost advantages are its emerging-market competitors. And American consumers have been the beneficiaries. Since 1997, U.S. consumers have saved about $100 billion a year in import bills as lower-priced goods, primarily from China, have supplanted goods from other regions.
U.S. businesses have been a force behind China's export performance. Foreign-owned companies and joint ventures between Chinese and foreign investors, many of them American, produced much of China's exports over the last decade. Foreign companies currently account for about 50% of China's exports and about 60% of its imports.
China's large trade surplus with the U.S., heading toward $130 billion this year, obscures the fact that China is also a voracious importer. Since 1995, China's imports have grown twice as fast as U.S. imports. This year, sales to China will account for nearly three-quarters of the increase in Japan's exports, 40% of the rise in Korea's exports, 99% of the boost in Taiwan's exports, and about a quarter of the increase in U.S. exports. China is America's fastest-growing export market, expanding at an annual rate of about 20%. American companies sell $20 billion worth of goods to China.
Finally, China is nurturing America's economic expansion by helping to keep U.S. interest rates low through substantial purchases of government debt. During the past year and a half, China bought more than $100 billion in U.S. government securities. China is a primary source of funding for the U.S. fiscal and current-account deficits.
The U.S. current-account deficit is large and rising. It is financed by the Chinese, Japanese, and other central banks of Asia that are channeling the substantial domestic savings of their populations into funding the spendthrift, debt-ridden ways of Washington.
The growth of the world economy today depends on a simple logic -- the U.S. spends, and Asia lends. Protectionism threatens to upset this logic, as the recent sell-off in dollar assets following the unilateral imposition of quotas on Chinese textiles by the Bush Administration indicates. Alan Greenspan recently warned that new protectionist initiatives in the context of wide current-account imbalances could erode the flexibility of the global economy. Such initiatives could roil currency markets, undermine capital flows, and strangle the nascent global expansion. Are a few votes in a few swing states really worth the risk?
Laura D'Andrea Tyson is dean of London Business School.