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The Polemics and Realities of U.S-China Trade
Milton Kotler

President, Kotler Marketing Group September 2012

During his August 2012 trip to China, Nebraska Governor Dave Heineman reported to the China Daily that “I want the Chinese people to understand the warmth, the hospitality and welcoming atmosphere we have in Nebraska - that we will give your businesses the opportunity to grow and prosper." China is Nebraska's fourth-largest trading partner and among its fastest-growing overseas export markets. He went on to say, “Obviously we have a good relationship with Canada and Mexico - they are our northern and southern partners. But we are looking throughout the world," adding that fast growth may make China the state's No 1 trading partner.

If this should happen, Nebraska will join Oregon, Washington, Alaska and Louisiana where China is already the #1 export partner. If China only reaches 2nd place in Nebraska, then Nebraska will join Alabama, Georgia, Maryland, Minnesota, Pennsylvania, North Carolina and Vermont as states where China is already the #2 export partner. If China reaches third place in Nebraska’s exports, that state will join Arizona, Delaware, Illinois, Maine, Missouri, Nevada, New Hampshire Ohio, South Carolina, South Dakota, Tennessee, Texas and Wisconsin where China already holds third place in 2011 exports.

According to the U.S. China Business Council, 30 U.S. States rank China among its top three export partners for goods and merchandise. The other 20 States are not far behind. Total 2011 U.S exports to China reached $103.9 billion, ranking third after its neighbors Canada and Mexico. By contrast, the U.S. is only China’s 5th largest source of imports. But note: China accounts for nearly 10% of all U.S. export of goods, which totaled $1.4 trillion in 2011. Since, $1 billion of U.S. export results in 7,00 jobs, according to Gary Huffbauer of the Peterson Institute for International Economics, U.S. export to China in 2011 produced roughly 70,000 jobs in the U.S. in that year alone. Not bad for a country starving for job growth!

Notwithstanding the polemics of politicians who threaten China with punitive monetary and trade actions and a U.S. press that obligingly ignores U.S. export realities, the facts speak for themselves. China has as much on-the-ground trade leverage on the U.S. as the U.S. has on China. U.S. leverage rests on Chinese imports. China’s leverage rests on U.S. exports.

President Obama has called for a 15 percent annual increase in U.S. exports to China. The fact is that China is the only export market for U.S. goods that has consistently exceeded 15 percent since 2000. It has dropped below this mark for the first time in eleven years, but is likely to rebound with China’s new economic stimulus initiative. Governor Romney may declare that he will label China a currency manipulator on his first day in office, should he win election, but this astute businessman knows that if he wins, he will have to sugar coat this electioneering bluster.

Polemics aside, China is deeply entrenched in the economics and politics of U.S. State and local governments and their business constituents. No U.S. Congress or President can politically subvert the economies of their Congressional districts and business contributors with currency sanctions, excessive punitive trade barriers and the fatal risk of trade war. While politicians and the press assail China over monetary policy, unfair trade, human rights and a host of alleged Chinese abuses, the Chinese government and its State-owned and private businesses have been steadily building grass-roots trade relations with U.S. State and local governments and their indigenous businesses since 2000 for the export of crops, computers and electronics, chemicals, paper, transportation equipment, waste and scrap and other goods.

In 2000 export to China was 16.2 billion. By 2011 it reached $103.9 billion, If we add export to Hong Kong, which is largely throughput to China, this figure reaches $140.4 billion, inching closer to Mexico’s $197.5 in U.S. export and more than double U.S. export to Japan. While the EU currently receives twice as much U.S. export as China, its annual import growth rate from the U.S. is less than 1/6th the growth rate of exports to China.

The basic dynamic of U.S. export growth over the past decade has been State and city business delegations to China and the opening of State trade offices in China. As of 2010, Idaho, California, Ohio, Maryland, Virginia, New York, Illinois, Kansas, Georgia, Louisiana and 20 more U.S. State governments have registered trade offices in China. These offices promote export and manage a continuous stream of trade missions from their State to China and from Chinese provinces and cities to their own States and cities. Many American cities like New York City, Chicago, Philadelphia, Los Angeles, Washington, D.C. and others have their own trade offices in China. Even Columbus, Indiana, a city of only 44,000 people has a registered trade office in Beijing.

As much as the 2012 Presidential election is ranking job growth as the #1 issue, it is the governors, mayors and their local business cohorts who have carried the load of export driven job creations in their jurisdictions for the past two decades. National politicians can espouse export growth, while decrying China and proposing protectionist barriers to China trade; but State and local governments and their business leaders that praise China and do the leg work of China export promotion, deals and private sector job growth.

What do we make of these realities in contrast to the polemics? Three things should be noted.

1. There is a disconnect between political rhetoric and political fact. China has been a well established scapegoat in American politics since the Liberation of China in 1949. The Korean War prolonged animosity. The McCarthy red scare beat the bushes for all commies well beyond McCarthy’s death in 1957. Taiwan’s defense and the Vietnam War sustained the threat of China until Nixon’s visit in 1972, which began to purge this fear. President Carter stabilized relations and mitigated three decades of hostility with the establishment of the U.S. embassy in China in 1979. Reagan warmed feelings toward China as a tactical stress upon the Soviet Union until its collapse in 1989. In quick order, the U.S. reversed its tactical affection with post-Tiananmen economic sanctions and adverse relations. Under great pressure by business to return to the China market, Clinton promoted international trade and investment with China in the ‘90s.

Following the high tech crash of 2000, State governments and cities, along with their business leaders got worried about jobs and paved a trail of export to China. This fact on the ground had to continuously battle Congressional opposition and a hostile press, which always found a new ways to curse China with a cudgel of human rights abuse of and off-shoring jobs. Notwithstanding, it has been the persistence of local political and business leadership, who feel the heat of poor economy and jobs pressure, that has brought us to the height of export trade with China that we enjoy today. Really, no thanks to Congressional politics or the press.

2. While the Chinese embassy in Washington jostled diplomatically with Congress and the Executive branch over trade and monetary policy, the commercial office of the embassy and its consulates in Chicago, New York City, San Francisco, Los Angeles and Houston divvied up direct commercial representation to all 50 states. The embassy in Washington handles relations with Delaware, Idaho, Kentucky, Maryland, Montana, Nebraska, North Carolina, North Dakota, South Carolina, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming. The consulate in New York City handled Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Vermont. The consulate in Houston covers Alabama, Florida, Georgia, Louisiana, Mississippi, Oklahoma and Texas. The Chicago consulate handled Colorado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri and Wisconsin. The consulate in Los Angeles attends to Arizona, Southern California, Hawaii, New Mexico and Pacific Islands. The San Francisco consulate covers Alaska, Northern California, Nevada, Oregon and Washington.

As diplomatic commerce spread its wings, Chinese provinces and cities also established direct trade offices in U.S. cities. Shenyang set up a trade office in Chicago in 2008. Tianjin Economic-Technological Development Area (TEADA) has offices in Chicago and Dallas. Shenzhen has a trade office in Los Angeles. Other large Chinese cities and their local businesses have direct relations with U.S. states and cities not only to promote Chinese export, but also to put their own local Chinese businesses in contact with American producers for import.

Chinese local trade offices along with the support of American business NGOs, like the U.S. China Business Council, did the heavy lifting of expanding U.S. exports to China from $16.2 billion in 2000 to $103 billion in 2011 – an increase of 542 percent. All of this under the radar screen of political and press polemic.

3. Any talk in the U.S. from politicians, union leaders and other special interest groups about getting tough with China must be taken with a grain of salt. U.S. job growth cannot come from any domestic recovery of its mature economy. It must come from export and this means China, as the world’s largest growing economy, however hobbled from 10% GDP growth to 7.6% growth, and a 2012 reduction in its export growth rate.

No matter which candidate wins the Presidential election, local economic pressure for export to China and its job creation will continue. China’s percentage of total U.S. exports will grow beyond 10 percent as the rate of export growth to the EU and our Canadian and Mexican neighbors declines. U.S. job growth needs export to China. Polemics are a drag on this local reality.

The best thing the U.S. Federal government can do to help State and local government and their indigenous businesses to grow is to get out of the way. The Federal government should curtail CIFIUS and other regulatory barriers to technology export, and beef up export bank financing and other trade support services Chinese diplomacy will never change U.S. opinion in its favor, but it can change the self interest of local leaders by job facts on the ground. Eventually a more solicitous opinion and relationship at the national level may emerge.