from Follow the Money

Why Haven't U.S. Exports of Manufactures Kept Pace with China's Growth?

January 8, 2019

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China is a big country, and, at least until recently, it was growing relatively fast. So it stands to reason that it should have been among the most rapidly growing markets for U.S. exports. 

The rapid growth of U.S. exports to China is the kind of thing that is often asserted in foreign policy speeches seeking to illustrate the importance of a healthy Sino-American relationship.   

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And it is often sort of implied in more recent articles that highlight the impact of China's slowdown on U.S. firms.

But, well, China wasn't actually a rapidly growing market for U.S. exports of manufactures even before its recent slowdown.  The emphasis here is on "exports." I intentionally am not equating the sales of U.S. firms in China with U.S. production.

Obviously, China’s retaliation against U.S. tariffs has played a large role in the data for the last few months. But the trend here dates back to the start of Obama’s second term. It isn't new.

Over the last five years (since the end of 2013), China’s GDP (in dollar terms) is up 40 percent. U.S. GDP is up something like 20 percent. Exports of manufactures to China and Hong Kong are up less than 10 percent.*

us exports of manufactures vs Chinese and US GDP (growth since end 2013)

In other words, exports of manufactures to China were falling both as a share of Chinese GDP and as a share of U.S. GDP over the last five years (the fall during the crisis reflects China's broader reorientation toward domestic investment, and was matched by a fall in China's exports, though the downtrend actually started before the crisis).

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US Manufacturing Exports to China and HK (annualized share of chinese gdp)

There have been times when the Chinese market for particular U.S. exports did grow rapidly in dollar terms. Chinese imports of aircraft rose from around $5 billion before the crisis to close to $15 billion by 2013. China’s imports of U.S. made autos (BMWs and Mercedes SUVs more than anything else) soared between 2007 and 2013, as the German luxury auto brands met booming Chinese demand after the global crisis from the facilities they constructed in the United States in the early aughts.**

But there just haven’t been many big success stories in the past few years. In dollar terms, total U.S. exports of manufactures doubled in the five years that followed the global crisis. And then they basically stalled in the last five years.

US Manufacturing Exports to China and HK (annualized, usd Billions)

Total exports of manufactures (excluding refined petrol) to China are up a cumulative $10 billion (an average of $2 billion a year) over the last five years. That just doesn’t register in an economy as big as that of the United States.   

US trade with China in manufactures (dollars, increase since end 2013)

To be sure, U.S. semiconductor firms get a large share of their sales from China, though many of those semiconductors aren't manufactured in the United States anymore and many of their sales to "China" don't reflect final Chinese demand.*** And U.S. companies that produce in China for the Chinese market—Apple and GM in particular—are exposed to swings in Chinese demand.  

Their offshore profits certainly matter for the stock market, and thus indirectly impact U.S. consumer demand. And China buys a lot of commodities these days. I just don't think China's imports of commodities tell you as much the openness of China's economy, as China has to import commodities from someone.  

There is another angle worth considering too—U.S. exports of manufactures haven’t done well in general over the last five years. The relative weakness of growth in U.S. exports to China might say more about the U.S. than China.

But it turns out that the U.S. experience in China isn’t unique—exports from Europe and the rest of Asia have also lagged China’s own growth. Europe has done the best (exchange rates do matter), but its export performance also has lagged China's dollar GDP.

Chinese imports by origin vs Chinese GDP (growth since end 2013)

Call it indirect evidence that Xi’s industrial policies, which often have an import-substituting component, have been modestly successful.

Or evidence that China’s market still isn’t particularly open. A percentage point of growth in China hasn’t, in the post crisis period, typically translated into a percentage point growth in China’s non-commodity imports.****

The policy challenge is fairly obvious, at least to me.   

China wants to preserve access to the U.S. market for its own manufactures—it wants to avoid premature decoupling (see Greg Ip). But its offer, to date, doesn't seem to include anything that would materially change the currently stalled trajectory of U.S. manufactured exports.***** 

China's reported concessions would make it easier for U.S. firms to set up shop in China (and be treated as Chinese once they establish in China and thus compete in theory on a level playing field) and expand the set of U.S. commodities that China would purchase (corn and rice for example, plus more oil and LNG).

Apart from the modest reduction in tariffs in autos, I at least don’t see any concrete offer to change the policies central to China’s recent pattern of import-substituting growth. That would require China abandon some of its domestic subsidies, and—somehow—credibly commit not to favor domestic Chinese production over imports.******

Remember, narrow-body aircraft (Boeing 737s) are among the biggest U.S. exports of manufactures to China. And in the future, narrow body planes will compete with a subsidized, indigenous, Chinese product for sales to China’s state-owned airlines. The basic set up here matches the market structure that China used to favor its own "indigenous" telecommunications equipment producers over the last fifteen years (see Roselyn Hsueh).

Unless something more changes, U.S. aviation component producers will still face informal pressure to set up shop in China to get sales to COMAC. The Wall Street Journal reported that this pressure was basically a given a few months back: "When China set out to build its first large commercial passenger jet in 2008, state-owned Commercial Aircraft Corp. of China made clear it would buy components only from joint ventures whose foreign partners would share technology." That kind of deal minus the forced technology transfer would still create opportunities for U.S. firms, but not necessarily opportunities for U.S. workers.   

Even if China reverses its U.S. specific auto tariffs and U.S. exports face the new standard 15 percent tariff rate, I would now bet that U.S. workers will make fewer, not more, cars for the Chinese market over the next few years. BMW and Tesla are now both investing more in China, thanks to a shift in Chinese policy that has allowed foreign owned auto manufactures to invest without necessarily forming a joint venture. The old joint venture requirement effectively acted as a tax on manufacturing luxury cars in China; getting rid of it encourages firms to produce more not less in China. BMW is now talking about using its Chinese factory as an export base.

There aren't many ways to make up for the $25 billion of autos and aircraft that the U.S. now exports to China, especially when China has policies that aim to subsidize and support indigenous production of semiconductors and medical equipment. So long as China's policies here can only be adjusted at the margins, the downward trend in U.S. exports of manufactures relative to China's GDP seems likely to continue.  

China’s vision of its future seems to be one where it increasingly exports capital goods while it imports consumer goods and commodities. That’s ultimately a vision where there is less trade with the world’s other advanced big economies than was the case in the period that immediately followed China’s entry into the WTO. 

So, setting commodity purchases aside, maybe a deal that creates more scope for U.S. firms to succeed in China if they invest in China is the best that the U.S. can realistically expect to do? That though is a world where the benefits of China's growing economy will largely flow to those who own valuable technology that can be licensed to a firm that produces in China, not to a broader group of Americans.*******

* Exports to China and Hong Kong are up by just over 5 percent since 2013; exports to China itself are up more like 10 percent. However, I strongly believe that trade through Hong Kong should be added to the Chinese data. U.S. exports to Hong Kong used to account for something like a fifth of total U.S. manufactured exports to greater China, and I think it is clear that a lot of U.S. exports to Hong Kong don’t stay in Hong Kong. Adding in exports to Hong Kong also helps raise U.S. exports to "China" to levels that match what China thinks it imports from the United States.

** These exports sometimes get discounted because they come from German companies. They shouldn’t be. The German transplants support a ecosystem of local suppliers, and ultimately support far more U.S. jobs than say GM’s production in China. It of course would be great to have exports of goods that are both designed and manufactured largely in the United States, but outside of aircraft, there just aren’t all that many examples.

*** Weijian Shan is an extremely impressive man. But I wasn't persuaded by his argument. It equates U.S. firms with the United States a bit too much for my taste. And China's apparent importance to U.S. semiconductor firms clearly warrants a bit more critical scrutiny. I would bet that the bulk of Micron's and Intel's sales to China don't reflect end-demand in China. And, well, we know from the trade data that U.S. semiconductors exports to China and Hong Kong account for something like $10 billion of the $200 billion plus (total imports of integrated circuits were $300 billion) of semiconductors that China imports. That's a quite low share. It no doubt reflects both transfer pricing and the extensive use of Asian fabs by U.S. firms.

**** In technical terms, the income elasticity of China’s imports looks well below 1, especially if commodities are excluded. See, among others, the ECB's research department. This may have changed a bit in the last two years, but I increasingly suspect the rise in China's manufactured imports over the last two years is tied to the rise in semiconductor prices more than any structural shift.

***** For those who are interested, here is the bilateral balance in manufactures. There is no particular reason why it should balance.   

US Manufacturing Imports and Exports to China and HK (t4q sum, usd Billions)

The gap with China reflects the broader imbalance with East Asia, as there is substantial Korean and Taiwanese content embedded in the typical Chinese electronic export. But it also illustrates that the slowdown in U.S. exports in the last five years hasn't been matched by a slowdown in U.S. imports.

****** The Trump Administration does seem to be asking China to live up to its WTO commitment to report its domestic subsidies. But China is under no obligation to give up its domestic subsidies, only to report them. And in an economy with Chinese characteristics, determining the exact subsidy is difficult: all state firms tend to get preferred access to credit.

******* Apart from tourism, and the transport of goods, "services" still tend to be hard to trade across borders (U.S. exports of services to China are mostly education and tourism, which require the physical movement of people). Most proposals for liberalizing services trade would in practice tend to make it easier to invest in China to deliver services in China, not use U.S. workers to provide services across the border. I am setting IPR license fees aside here, they are a bit different.

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