The Upside of U.S. Trade With China

Surging imports from China have produced record U.S. trade deficits with that nation, grabbing headlines and fanning protectionist flames here.

But often overlooked in the trade tussle is another fact: U.S. exports to China also are booming.

Spurred by China’s sizzling domestic growth and market-opening measures triggered by the country’s 2001 entry to the World Trade Organization, U.S. exports to China more than doubled between 2000 and 2004. China has become America’s fifth-largest export market, behind Canada, Mexico, Japan and Britain.

“You can’t ignore China today if you’re a company that has any kind of global footprint,” said Kurt Kuehn, a senior executive with United Parcel Service Inc., which tripled its service to China this year.

China’s appetite for American products and services runs the gamut -- notably in raw materials, technology, transportation and banking -- with California companies enjoying a significant share of the action. Topping the export list last year were power generation equipment, electrical machinery, soybeans and medical equipment.

A huge part of that growth came from China’s export- oriented factories, nearly half of which are owned by American and other foreign companies. China bought one-third of U.S. cotton last year, much of it grown in California, to produce the material that was shipped back to the States in clothing and fabric.

Semiconductors produced by Silicon Valley companies were sent to China, where they were installed in Dell Inc. computers and Motorola Inc. cellphones bound for U.S. customers.

California companies such as Ryan Security Technologies Ltd. have benefited from China’s preference for American-made technology goods.

For the last three years, the distributor of U.S. medical and security equipment has enjoyed sales growth of 30% to 35% to Chinese government agencies and private companies.

“There’s still an overwhelming perception that imports are better than local, at least in the quality of technology,” said founder Eric Ryan, who commutes between his company’s Santa Barbara headquarters and offices in China.

Airports, train stations and ports, prompted by the 2001 terrorist attacks, are buying X-ray machines sold by Ryan to screen for weapons and explosives. The growth in high-profile events -- such as last year’s meeting of the Asia Pacific Economic Cooperation forum in Shanghai and the 2008 Summer Olympics in Beijing -- has generated demand for the company’s surveillance products.

Chinese courts and police departments, under pressure to raise their operations to international standards, are buying handwriting analysis machines and other forensic devices distributed by Ryan. Private hospitals equipped with the company’s latest in diagnostic and surgical equipment are springing up to serve middle-class Chinese.

“China is leapfrogging into the latest and greatest technology,” Ryan said.

In all, U.S. exports to China totaled $34.7 billion last year, growing by 114% from 2000 to 2004. That compared with 7% growth in exports to Germany, a 6% rise to Canada and a 17% drop to Japan. California, the leading U.S. gateway for trade with China, saw its exports to the country nearly double, to $6.8 billion in 2004 from $3.6 billion in 2000.

But as U.S. exports to China boom in percentage terms, they still lag far behind the flood of goods coming from the other direction. That’s why the politically sensitive U.S. trade deficit with China soared to $162 billion last year, the largest with any country.

That has prompted various lawmakers and industries to call for limits on Chinese imports.

But China has taken steps to open its markets to foreigners. Since joining the WTO, Beijing has slashed tariffs on imported goods by half and eliminated most import quotas and licenses.

One sector to benefit from such market-opening measures is services. Most restrictions have been removed on foreign service companies in the last two years, said John Frisbie, president of the U.S.-China Business Council.

The changes have inspired a rush to China by U.S. banks, insurers, retailers and transportation companies, including United Parcel Service.

The Atlanta-based shipping company recently launched its first nonstop flight between the United States and Guangzhou, one of the largest cities of southern China.

In December, UPS said it would acquire direct control of its express operations in 23 Chinese cities from its longtime partner, government-owned Sinotrans. UPS’ supply chain management company is opening 20 more logistics centers in China this year.

The lopsided nature of U.S.-China trade means planes and ships arrive in the United States full and often leave empty. But UPS senior executive Kuehn believes that China’s appetite for U.S. goods will increase.

“We’d sure love it if the planes were full both directions,” he said. “But I think that’ll come over time.”

U.S. manufacturers complain that they would be able to close the trade gap much more quickly if China allowed its currency to float. The Chinese yuan is tied to the dollar and has weakened along with the greenback. A weak yuan makes that country’s goods cheaper in foreign markets.

President Bush, Treasury Secretary John W. Snow and Federal Reserve Chairman Alan Greenspan all recently urged China to move more quickly toward a market-based currency.

Also, 23 members of Congress recently filed a petition asking the U.S. trade representative’s office to take action against China on the currency issue. The Bush administration turned down a similar request last year. The same group is pushing a bill that would force China to revalue its currency within six months or face a 27.5% tax on all exports to the United States.

The U.S.-China Business Council, the National Assn. of Manufacturers and other business groups oppose the measure, arguing that it would only raise costs for U.S. importers and consumers and would trigger retaliation from China against American goods. They have urged the Bush administration to keep working through diplomatic channels.

A stronger Chinese currency would be good news for Rapiscan Systems, a producer of walk-through metal detectors and other security products. Rising concerns about terrorism and crime have boosted sales to China, which are running 50% above expectations, said Brian Kaval, the company’s special projects manager. Rapiscan is a division of OSI Systems Inc. of Hawthorne

But Kaval said his company had trouble competing against Chinese rivals that enjoy government support, low labor costs and a currency advantage.

“The real short and sweet of it -- that exchange rate really hurts,” he said.

Unless its Chinese customers insist on having goods with a “Made in the USA” label, Rapiscan produces its China-bound goods in Malaysia, where costs are lower. And if sales continue at their rip-roaring pace, the company may move production to China.

Executive Ryan of Ryan Security Technologies, which distributes Rapiscan’s products in China, agrees that the yuan is undervalued. But he would be far more worried about a “tit for tat” retaliation if the United States took aim at Chinese goods.

He was in China in 1999 when NATO forces mistakenly bombed the Chinese Embassy in Belgrade, Yugoslavia, touching off violent attacks against U.S. government offices and companies.

“I had a Chinese official say, ‘We can’t buy a U.S. product because we are arguing about the Chinese Embassy being bombed,’ ” Ryan said. “Particularly in high-profile disputes, China will punish U.S. companies.”