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By Zhou Shijian and Wang Lijun

Since the beginning of this century, bilateral trade between China and the United States has risen rapidly, benefiting both sides.

According to China customs statistics, China's exports to the United States were US$52.1 billion in 2000 and reached US$162.9 billion in 2005, an increase of 212 percent. According to US customs statistics, the US exports to China were US$16.2 billion in 2000 and reached US$41.8 billion in 2005, an increase of 157 percent. Among the top 15 trade partners of the United States, US exports to China had the fastest increase.

According to US statistics, China was the United States' fourth-largest trade partner, the fourth-largest import trade partner and the 11th-largest export trade partner in 2000. However, by 2005, China had become its third-largest trade partner, the second-largest import trade partner and the fourth-largest export partner, next to Canada, Mexico and Japan. China is the strategic trade partner of the United States, as stated by President George W. Bush on March 9 last year.

According to US statistics, China's export to the United States was US$243.5 billion last year, accounting for 32 percent of China's US$762 billion total exports and 14.6 percent of US total imports. This demonstrates the fact that China and the United States are big markets to each other. In 1994, the US Department of Commerce listed China as the head of its top 10 newly emerging markets, which has been proven over the past 10 years.

Like commodities, capital also needs markets and can dwindle without high capital profits. According to statistics, by the end of 2005, the US actual investments in China reached US$51 billion. This demonstrates that China has become a big overseas market for US capital, next to Western Europe, North, Central and South America, and Japan.

China and the United States boast remarkable achievements in financial co-operation. By the end of November 2005, China held US$254.4 billion in US treasury bonds and a considerable amount of US enterprise stocks and private securities. By the end of 2005, China's foreign reserves reached more than US$810 billion, with 60 percent of them being US capital.

Since the beginning of 2005, the economic and trade relationship between the two countries, however, has encountered some trouble, as demonstrated by increasing conflicts and frictions. In future years, the economic and trade relationship between China and the United States is expected to face many challenges, for example: intellectual property rights, RMB exchange rate, trade balance, textile trade and market access in the services area.

It must be noted that most of these are the conflicts of economic interests among some industrial sectors rather than the conflicts of fundamental interests between the two countries and they can be settled through mutual understanding and negotiations. Besides, these frictions are only the minor ones in the Sino-US economic and trade relationship and should not affect mainstream economic and trade co-operation between the two countries.

The two sides should deal with any friction and dispute from a far-reaching perspective without intensifying the issue. Equality and mutual benefit are the foundations of economic and trade co-operation; complementary partners are an important condition for economic and trade co-operation; and friendly negotiation is an effective tool to settle frictions and disputes. The threat of sanctions and retaliation is not advisable, because it not only violates the multilateral trade system, but also intensifies the disputes rather than helping settle them.

Trade wars can only hurt both sides and economies having close economic and trade ties with China and the United States. Therefore trade wars are not acceptable or supported by most businesspeople within the two countries.

This has been demonstrated by the restrictions and counter-restrictions in the textile trade between the two countries. From June 17 to November 8 last year, the government delegations of China and the United States underwent seven rounds of hard negotiations and finally signed a memorandum of understanding (MOU) on the trade of textiles and apparel.

The MOU reflects the co-operative principle of mutual understanding and mutual benefit, setting a good example for the settlement of frictions and disputes in Sino-US economic and trade relations; it is also helpful for the further development of Sino-US economic and trade co-operation.

At present a relatively prominent issue is the US trade imbalance with China. According to China's customs statistics, China's trade surplus with the United States reached US$114.2 billion; while according to the statistics of the US Chamber of Commerce, the US trade deficit with China reached as high as US$201.6 billion.

The United States imports a large amount of daily necessities from China that are of good quality and low price and that satisfy the needs of US markets. The products benefit most consumers and help relieve US inflation, the adjustment of its industrial structure, and economic development.

Trade deficit is a trade behavior and should be analyzed from the perspective of market needs. China exported to the United States 40 or 50 million pairs of shoes in exchange for one big Boeing 747.

Therefore it should not be easily concluded that a developing country has trade advantages when it relies on the export of a large amount of labor-intensive consumer goods in exchange for a small amount of high-tech equipment and technology.

In the economic and trade co-operation between China and the United States, trade advantage stays with the United States. Since the beginning of 1993, the US trade deficit has been mainly attributed to the fact that the US advantage in high technology has not been brought into full play. To deregulate the management of technology export is the way to reduce China's trade surplus. The initiative of reducing trade deficit with China lies in the hand of the United States.

The US trade deficit is the consequence of economic globalization and the restructure of world industries and is the natural product of the world labor division. US trade deficit is a structural one and is irretrievable.

How should we look at the issue of trade imbalance between China and the United States?

First, one main feature of Sino-US trade is that most Chinese exports to the United States are processed products, accounting for about 70 percent, which means that China only gets a small amount of processing fees.

Take the Barbie doll for example. One Barbie doll is sold at US$9.99, but only costs US$2 when imported from China. Its raw materials come from the Middle East and are made into semi-products in Taiwan, the wigs are made in Japan, and the packing materials are provided by the United States the total of these three parts makes up US$1. Transportation and management costs US$0.65, and the Chinese mainland is left with only US$0.35 for processing. In light of the rule of origin, these US$2 are put into China's export to the United States. Obviously it cannot tell the real case of the trade between the two countries.

Second, 70 percent of China's foreign investments are from East Asia. For many years, Japan, the Republic of Korea, Singapore, Malaysia, Thailand, the Philippines and China's Taiwan have shifted their former trade surplus products to the Chinese mainland, thus causing the "shift of trade imbalance." So, the products made by these co-operative or 100 percent overseas-owned enterprises are actually Made in Asia instead of Made in China, and China's trade surplus is shared by the above countries and region rather than owned by China alone.

According to US customs statistics, the US imports from the above countries and region in 2000 were US$302.3 billion, while in 2005 the imports did not increase but fell to US$294.7 billion by 2.5 percent. During the same period, its imports from China jumped to US$243.5 billion from US$100 billion, an increase of 140 percent.

According to Chinese customs statistics, China's trade surplus with the United States was US$114.2 billion in 2005, but it had a trade deficit of US$140 billion with the above countries and region.

In this sense, China is an Asian processing center. As Li Deshui, former director of the National Bureau of Statistics, said, China's trade surplus with the United States and Europe is in fact a passer-by, a reality of having more flowers than fruits.

Third, the economic and trade relationship between China and the United States is reflected in four areas: commodity trade, technology trade, service trade and mutual investment. The trade deficit generally refers to that of commodity trade.

The US advantage in its trade lies in the past three areas. By the end of 2005, the actual investment in China by US enterprises was US$51.1 billion, with 49,000 businesses set up. Most of the products made by these enterprises are sold in the Chinese market, with only a small portion of them sold to the US market.

Take GM and Motorola for example. There is a strong demand for their cars and mobile phones made in China, which, as a matter of fact, replace China's import of cars and mobile phones from the United States. These US enterprises enlarge their investments with the profits made in China and remit the remainder to the United States, which in fact makes up part of the US trade deficit.

According to incomplete statistics from the Chinese Ministry of Commerce, in 2004 US-owned firms' sales in China reached as high as US$75 billion, which can offset 46 percent of the US$162 billion US trade deficit with China that year.

During the five years from 2001 to 2005, China's total imports were US$2.173 trillion. During the next five years from 2006 to 2010, China is expected to have imports worth US$4 trillion. This really is a big newly emerging market.

As long as the Bush administration can greatly deregulate export management with China like the Reagan administration did, the US large- and medium-sized enterprises will have the ability and the possibility to capture more shares in China's rapidly growing new market, and China will surely become a big market for US exports.

The industrial structures of China and the United States can strongly complement each other, which guarantees a bright future and greater development for broad economic and trade co-operation between the two nations.

The combination of US capital, technology and management experience with China's huge market, low-cost labor and resources will surely bring great benefits to the economic development of both countries.

China's modernization needs a large amount of US capital, technology and equipment, which can push and promote US economic development. Therefore, economic and trade co-operation between China and the United States is mutually beneficial and a win-win situation with bright prospects.

Zhou Shijian is the standing councillor of China American Studies and Wang Lijun is a lecturer at the Capital University of Economics and Business.

(China Daily April 18, 2006)