Booming

09.20.12

U.S.-China Economies Ties Deepen as Tensions Rise

As American and Chinese politicians squabble, economic ties between the two countries deepen.

China-U.S. trade tensions are mounting. The two presidential candidates are falling over themselves to bash China. GOP nominee Mitt Romney routinely chastises President Obama for being soft on China, and promises that, if elected, he will deem China a currency manipulator. President Obama is using more than his bully pulpit to express anger at China. This week, his administration filed a case with the World Trade Organization seeking to limit imports of car parts from China. China is returning the lack of affection. Secretary of State Hillary Clinton was snubbed by heir-apparent Xi Jinping on her recent visit. And on Tuesday, protesters surrounded the car of U.S. Ambassador Gary Locke.

But a funny thing has been happening as economic tensions between the two countries rise: the financial ties that bind them are getting thicker and stronger. The data, the actions of policymakers, and the decisions by Chinese and American firms all show that the level of trade and investment between the two countries is growing. One veteran observer isn’t surprised. Despite the noise, “the relationship has become broader and deeper,” notes Tung Chee Hwa, the Hong Kong shipping magnate who served as governor of Hong Kong from 1997 to 2005, during the period in which control of Hong Kong passed from the U.K. to China. Tung is now chief executive of the China-United States Exchange Foundation (CUSEF) in Hong Kong, and a member of the Chinese People’s Political Consultative Conference, a sort of council of elders in Beijing. (Disclosure: in the past I’ve participated in CUSEF programs). And Tung believes the made-for-media clashes mask a profound change that is offering long-term opportunities for the U.S. economy: the continuing shift of China from an export-oriented economy to one driven by domestic consumption.

The numbers back him up. The latest trade data show that the U.S. still has a huge trade deficit with China—$174 billion so far this year. But U.S. exports to China, which were negligible just a few years ago, totaled $61.4 billion through July 2011, up from $57.7 billion in the first seven months of 2012. China is now the third-largest destination for U.S. exports, behind only Canada and Mexico. Imports from China were $235.8 billion through July 2012, up from $218 billion in the first seven months of 2011. So far this year, the total volume of trade between the two countries is up 7.8 percent. That’s all the more impressive given the slowdown in the rest of the world. And it means more work for all the people involved in trade: producers, importers, exporters, dockworkers, cargo shippers, railroads, truckers.

The nature of the trade is changing. Yes, China still sends the U.S. a lot of cheap manufactured goods, and America sells China a lot of government bonds. But there’s much more going on, including direct investment in the U.S. by Chinese firms. Chinese company Wanda in May agreed to pay $2.6 billion for the AMC movie chain. That’s the largest Chinese corporate acquisition of a U.S. company. Earlier this year, oil company Sinopec struck a $2.5 billion joint venture with Devon Energy to exploit shale oil resources in the U.S. Chinese buyers are becoming significant purchasers of real estate in New York and Miami.

Indeed, the rising power of Chinese people to spend—abroad, and at home—is one of the big themes in the global economy. In the first five months of 2012, 523,000 Chinese tourists came to the U.S.—up 42 percent from the first five months of 2011. Over time, Tung notes, “consumption will become the main driver in the economy, like in other countries.”

In the first five months of 2012, 523,000 Chinese tourists came to the U.S.—up 42 percent from the first five months of 2011.

Now, some U.S. companies have struggled in China’s domestic market. Home Depot recently announced it would close several stores. In a nation of very small homes, Home Depot big boxes may not have been a great idea. But Tung notes several other successes. In February, when Xi Jinping visited the U.S., China agreed to open up its film market so that more American movies can be shown there. “You can see Procter & Gamble doing $5 billion of business in China, and it is one of the largest consumer-product companies in China,” Tung notes. Walmart has successfully married American logistics and supply-chain techniques to Chinese consumer needs. And General Motors sells more cars in China than it does in the U.S.

Just as China has been meeting America’s need for cheap manufactured goods, the U.S. is meeting China’s need for affordable supplies of food. In a nation of 1.3 billion people, only 30 years removed from desperate poverty, food security is a major issue. “China is importing 50 million tons of corn from America this year,” notes Tung. “They use it for animal feed.” As China grows wealthier, its citizens will consume more beef, chicken, and protein, which will only boost Chinese demand for U.S. products like soybeans and corn.

All of which is not to downplay or minimize any of the serious differences the U.S. and China have over economic and other policies. But even as politicians in Washington and Beijing trade barbs, pick fights, and imagine snubs, the ports of Los Angeles and Shanghai are growing more busy with U.S.-China trade.