Symposium | The Middle-Out Moment

Trade: Boosting Exports to China

By Ed Gerwin

Tagged Middle Class

Twenty years ago, American businesses flocked to China with vague but ambitious plans to sell its billion consumers everything from toasters to telephones. But in a market that had no meaningful middle class, they found few takers. In the years since, China has successfully tapped into foreign investment and know-how to build a powerful, export-oriented economy—and a rapidly expanding middle class—largely by selling to America’s middle class. Its success has stoked American concerns about trade deficits and the loss of middle-class jobs to low-cost foreign competition.

But China’s ongoing transformation points to a potentially different future: one in which America expands its exports, achieves fairer trade, creates good jobs, and strengthens the middle class—by increasingly selling to China’s burgeoning middle class.

Building a vibrant American economy from the middle class out requires that we tap into new sources of economic growth—especially growth that supports well-paying jobs for middle-class workers. Significantly boosting U.S. exports to China could provide this kind of job-creating growth. Over the next five years, China’s economy is projected to grow by almost 8.5 percent annually (compared with just over 3 percent annually for the United States) and China’s import demand will surge by more than 10 percent—each year. And because export-related jobs tend to be good jobs—paying 15 percent more than the national average—America’s middle-class workers could benefit significantly from expanding trade with a fast-growing China. China is already America’s number three export destination, accounting for $111 billion in U.S. goods exported in 2012. But we can export much more. To crack open the full potential of the Chinese market, America needs to take a clear-eyed, hard-nosed, and long-term approach to the impediments to our trade relations with China.

This approach must begin with the recognition that there are no quick or easy answers. Some argue, for example, that the prime focus of American trade policy toward China should be on its currency manipulation, which obstructs U.S. exports by raising prices for American products in China. Currency practices can be a significant trade barrier, but they’re far from the only serious Chinese barrier to American exports.

Indeed, China employs a wide range of other unfair practices that can keep American products from reaching Chinese consumers. For one, China imposes market access barriers that often make it difficult—if not impossible—for many American firms to do business there. These include arbitrary inspection procedures that can strand U.S. wheat, grapes, or apples at the dock in China, and investment and qualification requirements that make it difficult for U.S. engineers, delivery firms, and other service providers to work there.

Another practice that demands attention is China’s widespread use of illegal subsidies. Rampant subsidies give unfair advantages to China’s producers when they compete against American firms in a broad range of industrial sectors, including telecommunications and clean energy. China’s state-owned banks, for example, provide government-directed, subsidized loans to both state-owned and private firms, while China’s government provides free or reduced-cost fuel, land, utilities, and other resources to favored domestic producers.

A third obstacle is that half of China’s economy is owned or effectively controlled by China’s government, which uses state-owned enterprises and national champion firms to advance national priorities like acquiring foreign technology. Often, this leads to serious conflicts of interest. In areas like telecom, for instance, the same Chinese agencies that regulate American companies are also directly responsible for the success of China’s state-owned competitors.

Finally, in a global economy in which over half of America’s exports incorporate some form of intellectual property, China’s extensive theft of American ideas is especially troubling. Virtually all of China’s music is pirated, and 15 to 20 percent of China’s products are counterfeit. China also uses joint ventures and an array of other “indigenous innovation” policies to mandate the transfer of American technologies. And it’s increasingly apparent that much of China’s rampant cyber-spying is geared toward stealing American technologies for China’s own firms.

The hard work of clearing away these and other barriers to American trade in China is vital because the Chinese market is an increasingly attractive prize for American exporters.

In just two decades, China has gone from having virtually no middle class to a massive middle class of almost half a billion. By 2020, China will add 250 million middle-class consumers, and its private consumption will swell to an astounding $10 trillion—a ten-fold increase over levels in 2000. China’s increasingly prosperous consumers are demanding high-quality goods, wholesome foods, and modern financial services. They want to travel and be entertained. And they’re pressing for improved infrastructure and increased spending on education, health care, and the environment. In short, China’s middle class wants the wide array of modern goods and services that America’s workers excel at producing.

Opening this growing market to American trade will require the United States to take a strategic and sustained approach that presses China to follow rules that assure more open and fair trade. And because export-related jobs are good jobs, America especially owes it to our middle class to aggressively pursue this important opportunity to increase our trade.

First, the Obama Administration must continue—and Congress must adequately fund—ramped-up enforcement efforts against Chinese policies that violate existing trade rules and hamper America’s ability to sell into China. This will require an ongoing commitment to bring well-chosen trade actions against China in the World Trade Organization, as well as persistent efforts in other lower-profile settings, including WTO committees and bilateral and multilateral forums.

Second, the United States must aggressively become a “rules-maker” in global trade. We should use trade deals like the Trans-Pacific Partnership (TPP) and a U.S.-European Union agreement to forge new and stronger rules against practices that China uses to block American trade, including favoritism for state-owned firms and the forced transfer or theft of valuable ideas. This will require us to abandon old notions about trade agreements, focus on trade’s benefits and its importance in an increasingly global world, and realize that if America doesn’t promote strong global rules, countries like China will establish a much different template.

Third, we must cooperate with a growing group of like-minded countries—including key TPP partners and European allies—in trade enforcement and rule-making. While we must avoid playing into China’s fears of being isolated, we must also make it clear to China that high-standard trade and open markets will increasingly be global norms.

Fourth, the United States must strive to convince China that opening markets is ultimately in China’s own interest. Chinese leaders already recognize that their low-wage, export-driven economic model is not sustainable over the long term. (China’s most recent five-year plan, for example, stresses the need for more sustainable economic growth based on significantly increased domestic consumption.) Encouraging China to move toward open markets and increased domestic demand will bring needed balance to the Chinese economy and benefit China’s people, while promoting exports and jobs for the United States.

Finally, for America to meet its full potential as an exporter to China, we’ll also need to focus on policies that improve our own economic fundamentals, including better worker training and smart incentives for innovation, as well as efforts to fix our crumbling infrastructure and improve our fiscal health. Pursuing these key priorities will boost U.S. competitiveness in markets like China, while also contributing more broadly to a stronger U.S. economy built on a vibrant middle class.

In his most recent State of the Union address, President Obama highlighted American companies that are re-shoring production and jobs to the United States. There’s a key reason for this new thinking: a growing recognition that companies need to weigh many factors besides labor costs—including proximity to suppliers, efficient transport, and sound laws—in deciding the best place to produce.

Similarly, there’s growing potential for a fresh approach to America’s trading relationship with China—and a real opportunity for China’s burgeoning consumer class to help support increased prosperity for America’s middle class. By 2020, China’s annual imports of goods will grow to almost $4 trillion. If by 2020 the United States could increase its share of China’s imports from 7.4 percent (our 2010 share) to 10 percent, which would represent a return to our share of Chinese imports back in 2000, that increase alone would boost U.S. exports by an additional $100 billion, and support almost 500,000 new—and largely middle-class—jobs. But to achieve this promise, America must roll up its sleeves, abandon old orthodoxies, and adopt a long-term strategy to assure that America’s middle class can share in China’s middle-class boom.

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Ed Gerwin is a trade policy consultant, former senior fellow for trade and global economic policy at Third Way, and author of the Third Way report "China's Trade Barrier Playbook: Why America Needs a New Game Plan."

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