Since China joined the World Trade Organization (WTO) in December 2001, it has significantly opened its market. This has been accomplished, in part, by reducing tariffs by nearly 40 percent, eliminating import licenses and quotas, and relaxing ownership restrictions.

In turn, China has become the world's third largest merchandise importer. On the other hand, due to its increasing capacity to produce goods at attractive prices, China has emerged as the world's third largest exporter. This has significantly contributed to the U.S. trade deficit and caused a backlash against China.

Tremendous Market Opportunities

In 2004, Chinese world merchandise imports reached $561 billion, $106 billion more than Japan’s, according to the WTO. China's thirst for oil, industrial metals and other commodities, as well as semi-finished products, has contributed to its huge demand.

This has benefited U.S. firms, whose exports to China rose 81 percent from 2001 through 2005. During the same period, U.S. exports worldwide increased just 12 percent.

China's population of 1.3 billion people, including 200 to 300 million consumers with considerable purchasing power, is continually increasing its appetite for U.S. software, agrochemicals, integrated circuits and semiconductors, and automotive, telecommunications and medical equipment.

An Economic Powerhouse

As China continues to demand more goods and services, its output also has increased tremendously. This has received mixed responses.

In 2004, Chinese global merchandise exports reached $593 billion, $28 billion more than Japan’s. This has benefited the United States in several ways. For example, access to low-cost imported components has made many manufacturers’ finished products more globally competitive, and the availability of inexpensive consumer goods has stretched the income of American families. Plus, Chinese imports have kept inflation low.

However, growing imports also have hurt U.S. manufacturers struggling to compete. Additionally, Chinese imports have resulted in a 2004 U.S.-China trade deficit of $162 billion. In response, policymakers have pursued various remedies. These have included pressuring China to float its currency, the reinstating of import barriers on Chinese products, and greater enforcement of intellectual property protection.

Little Movement on the Yuan

China's July 2005 shift in its exchange rate regime—from a fixed rate of about 8.28 yuan per dollar, to a managed float based on a basket of currencies—did not achieve the results for which many hoped. In the end, the yuan was not allowed to reflect what many believe is a higher, more accurate value—a move projected to raise the cost and reduce the competitiveness of Chinese exports.

Many economists, however, believe that China cannot risk floating the yuan for fear that it would cause instability due to that country's weak financial sector. And even if the yuan, also known as the renminbi, were to significantly rise, Federal Reserve Chairman Alan Greenspan said it's unlikely to impact the U.S. trade deficit. U.S. importers, he contends, would continue to seek low cost imports from other developing countries.

Back to Barriers

The Multifiber Arrangement, established under the General Agreement on Tariffs and Trade, now the World Trade Organization, provided for the elimination of quotas on textiles and apparel over the decade ending January 1, 2005.

As a result, U.S. and European buyers have begun to narrow their purchases to large vertically-integrated Asian suppliers. And China, in particular, is gaining an increasing share of textile and clothing production. Why is this occurring?

China offers large numbers of workers at extremely low wages. Plus, previous U.S. quotas on Chinese apparel imports had the equivalent effect of a 34 percent tax—much higher than other suppliers, according to the WTO. By eliminating this tax, China’s share of the U.S. apparel market is estimated to rise from 5.4 percent to 22.5 percent.

But since early 2005, textile and apparel producers in the United States, as well as in the European Union, have lobbied hard to erect new barriers against surging Chinese imports. To that end, the EU first slapped quotas on Chinese imports of sweaters, then men’s trousers, and then bras. Recently, the United States and China agreed on the imposition of quotas on a wide range of Chinese textiles.

The Ying and the Yang

With the ying comes the yang, and with new Chinese opportunities come new challenges and risks. For example, although China has implemented a tremendous number of reforms, it has fallen short in several areas, especially with regard to intellectual property, production subsidies, distribution rights and transparency.

In 2004, China’s gross domestic product was 14 percent of that of the United States'. However, based on growth projections, a Goldman Sachs report estimates China’s economy could exceed the United States’ by 2039. For many U.S. firms, China is viewed as a global partner that will continue to jointly produce more competitive products for worldwide consumption. For others, China is seen as an emerging threat.

Regardless of your view, one thing is certain: businesses need to reassess today’s new economic realities and adjust their global strategies accordingly.

About The Author John Manzella [Full Bio]

John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.




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