Growing U.S. Trade Deficit in Manufactures Raises Questions about Economic Impact

The trade imbalances between the U.S. and China in manufactured goods, and underlying structural changes in trade unfavorable to U.S. export competitiveness, raise broader questions about the economic impact, according to a new Manufacturers Alliance/MAPI report.

The U.S. global trade deficit in manufactures rose by 21% to $213 billion in the first half of 2011, compared with 2010, while the Chinese surplus soared by 27% to $280 billion. These trade imbalances are back to the excessively high pre-recession levels of 2008, notes Ernest H. Preeg, MAPI Senior Advisor for International Trade and Finance.

The report presents the cyclical course of the trade imbalances from 2008-2011 and examines the longer-term restructuring of Chinese exports from labor- to investment-intensive high-tech industries, making China more directly competitive with the U.S. for exports.

Preeg points out that manufactured goods constitute the dominant sector of trade, accounting for 95% of Chinese and 80% of U.S. merchandise exports.

The sector is also central to technological innovation, as two-thirds of U.S. civilian research and development and new patents derive from the manufacturing sector.

The first half figures for 2010 and 2011 also offer interesting comparisons for exports. U.S. manufactured exports increased by 21% in the first six months of 2010 to $495 billion, and by 13% in 2011 to $558 billion.

Chinese exports rose at a much faster pace, by 35% in 2010 to $668 billion, and by 24% in the first half of 2011 to $826 billion.

An emerging concern for U.S. manufacturers is the changing face of Chinese exports. "It is generally known that China has overtaken the United States as the world's top exporter," Preeg said. "In 2000, U.S. global exports of manufactures were three times larger than Chinese exports, while by 2010 Chinese exports were 50 % higher, and on track to double U.S. exports by 2013.

"What is less understood is the dramatic restructuring of Chinese manufactured exports away from labor-intensive to investment-intensive high-tech industries," he added. "This new orientation of exports is less driven by wage rates, especially for low-skilled workers, and is far more dependent on investment with advanced technology content."