China Poised To Pass U.S. In Manufactured Goods Exports

March 27, 2006
Shift to higher tech is troubling. What should the U.S. do?

Trade and currency discussions in Washington, D.C., next month between U.S. President George W. Bush and Chinese President Hu Jintao carry a new sense of urgency.

After pulling even with the U.S. last year in manufactured exports, China, whose symbol is the red dragon, this year "will almost certainly" surpass the U.S. to become the world's number one exporter of manufactured goods, says Ernest H. Preeg, the senior fellow in trade and productivity at the Manufacturers Alliance, an Arlington, Va.-based business and public policy research group.

According to Preeg's calculations, China exported $713 billion worth of manufactured goods in 2005, a catalog that predictably included such low-tech products as footwear and textiles and apparel, but more importantly also featured higher-tech goods such as office equipment and telecommunications equipment. Indeed, among China's six largest manufacturing export sectors in 2005, export growth among higher-tech goods -- which included electrical machinery, non-electronics machinery and chemicals in addition to office and telecommunications equipment - -was greater in percentage terms than for textiles and apparel. Exports of textiles and apparel grew 21% to $115.3 billion while export growth ranged from 26% to 29% among higher-tech goods; exports of higher-tech goods totaled $360 billion. "The picture that emerges is a global competition in trade in manufactures dominated by the EU, China, and the U.S., with Japan in a strong fourth position, followed by South Korea, and with [these] 'big five' together accounting for two-thirds of global exports of manufactures."

However, while China ran a global trade surplus in manufactured goods of $201 billion last year, the U.S. posted a troubling $662 billion trade deficit in manufactured goods. "For the U.S., a $700 billion deficit equates roughly to 50% of the value-added in the U.S. manufacturing sector," says Preeg. "In other words, if U.S. trade in manufacturers were in balance, manufacturing output, other things being equal, would be 50% higher and U.S. employment in manufactures would be up by about 6 million."

What can the U.S. do? The Bush Administration's American Competitiveness Initiative, which envisions more public funding of R&D and advanced training for engineers and scientists, will not be sufficient for the U.S. to retain its leadership technological innovation and development, believes Preeg.

The U.S. policy response, he contends, must also include pressuring China to revalue its currency, the yuan; pursuing full implementation of the commitments, including comprehensive action against piracy of U.S. intellectual property, that China made when joining the World Trade Organization five years ago; and increasing the rate of savings in the U.S. Substantial revaluation of the yuan could begin with a 10% to 20% increase this year, "followed by further revaluations in 2007 and beyond until a convertible, market-based exchange rate was achieved," posits Preeg.

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