Ties That Bind

RETHINKING U.S.-CHINA TRADE

U.S.-China trade relations have been on a fast track since the two countries signed a historic trade agreement in November 1999. That accord culminated nearly 15 years of difficult negotiations and helped pave the way for U.S. congressional approval of permanent normal trade relations with Beijing in 2000. Last year, further agreements in such sensitive sectors as agriculture, retail, and insurance were hammered out, facilitating the deal of all deals: China's entry into the World Trade Organization (WTO).

Notwithstanding this success at the bargaining table, the heavy lifting of U.S. trade negotiations will not do much to dent the outsized U.S. trade deficit with China, which topped $80 billion in 2001. While the negotiators were talking, the ground beneath U.S.-China commercial relations was shifting. Over the past decade, shallow links based on trade have been transformed into a more complex relationship shaped by rising U.S. foreign direct investment (FDI) and sales by U.S. foreign affiliates in China. Mirroring the global norm, sales by these affiliates, rather than U.S. exports, have become the preferred way to deliver American products to the Chinese market. As a result, U.S. export figures -- which do not count these affiliate sales -- understate the true level of commercial engagement between the two countries.

Meanwhile, more U.S. multinational corporations are using China as an export platform in the face of unrelenting global competition. An increasing percentage of the products these affiliates export from China is destined for the U.S. market. These goods count as Chinese exports to the United States -- even though they are shipped by U.S.-owned entities -- and they contribute to the ever-widening American trade deficit. European and Japanese multinationals are following a similar strategy of manufacturing in China for export, further adding to America's import bill from that country. Together, the delivery of U.S. goods through affiliates and the increasing use of the mainland as an export base by the world's leading multinational corporations could inhibit any significant improvement in the American trade deficit with China.