2018年CRI The unknown facts of US-China Trade: How does China help US economic transition?

When Trump 1 criticized global trade and resorted to tariff 2 barriers, he neglected the interdependence between China and the US economy, described as “structurally complementary” by experts. 

How did this interdependence come about? Some argue that it all began when global corporates, with US companies to the fore 4, embraced the outsourcing business model on a massive scale, in the 1980s. 

“They have made use of the fact that different countries have different comparative advantage. It is economically efficient and useful to exploit those comparative advantages from different countries, as you think about how to put together a car or an iPhone,” said Louis Kuijs, head of Asia Economics. 

The US, who is in charge of R&D, chose to produce and assemble products in low-cost places such as China with components 5 from different countries, and then the US distributed these products across the world, according to Li Yong, senior fellow of China Association of International Trade. 

As experts said, for the US, the increasing emphasis on the technology and service sectors 7 led to a lot of manufacturing jobs being outsourced, especially lower value-added ones. 

The beginning of this trend coincided with China’s launch of the reform and opening-up policy.

Drawing in foreign investment and boosting exports were the priorities for China at the time. Foreign companies, including US ones, set up factories in China, attracted by both the low labor 8 costs and the huge market potential. Before long, China was experiencing a boom in custom manufacturing that used materials and designs supplied by foreign companies. 

As new factories sprang up, millions of migrant workers from rural areas flocked to cities like Dongguan in search of jobs. It was on their shoulders that the country was raised to its leading position in global manufacturing. 

Being at different stages of development, the US and China are pursuing different development modes. As a result, they are a long way apart on the global value chain. 

In the US, the manufacturing sector 6 is in a state of gradual decline, as the economy completes the transition from manufacturing-based to technology, innovation and service-oriented. The IT industry has become a major driver of economic growth and job creation. 

In the 1990s, when the US experienced a period of sustained growth rarely seen since the Second World War, the so-called “New Economy” flourished, driven by information technology and innovation. 

But under the Trump administration, the decline in manufacturing has been labeled an economic failure. Outsourcing has been blamed for a decline in employment, with China accused of stealing American jobs. 

The fact is that the contribution of manufacturing to GDP in the US shrank to just 12 percent in 2016, while jobs created by manufacturing dropped to 9 percent of total employment. Yet, the overall economic situation shows that outsourcing has not hurt the US economy, but rather boosted it. 

In 1991, growth in the US was 4 percent, as the country enjoyed one of the longest periods of economic prosperity in its history. The unemployment rate fell from 7.4 percent in 1992 to 4.3 percent in 1998, the lowest in three decades.

These figures point to the US economic transition being a success, with outsourcing helping 9 to make the economy stronger. Clearly, this was the right strategy, with new economic sectors creating jobs to make up for those lost by outsourcing manufacturing. 

As the US economy has moved to the high end, China and other developing countries have picked up what the US has left behind – namely low-end manufacturing. Trade experts say the two economies are highly complementary, with China’s ability to produce and meet America’s demand. Naturally, this structural 3 difference also results in an imbalance in trade.