Despite the growing US-China trade imbalance that has been capturing headlines, the long-term benefits to the United States of trade with China are substantial and likely to endure.

This conclusion is based on a detailed assessment of US China trade and investment since 2000 and projections to 2010, as depicted by an Oxford Economic Forecasting (OEF) macroeconomic model, which captures trade and financial flows among all major economies.

Key findings include:

• Effects on the US economy:
• By 2010, US GDP will be 0.7 percent higher as a result of increased trade and investment with China since 2001.
• US prices will be 0.8 percent lower by 2010 as a result of increased trade and investment with China since 2001.
• Together, these equate to an increase of around $1,000 in real disposable income per US household per year. That is projected to be about 1.9 percent of median or 1.5 percent of average annual family income in 2010 (median family income was $44,389 in 2004). 
• Output per worker across the US economy will increase by 0.7 percent by 2010. Most of that increase is attributable to improvements in manufacturing productivity— annual growth in US manufacturing productivity will be boosted by 0.3 percent per year by 2010—as a result of increased trade with China.

1. increased competition, which causes the least productive manufacturing firms to close or to increase their productivity to compete with imports from China. Either way, the average productivity of the whole sector improves.
2. price effects, which allow US firms that source some of their inputs from China, or from other countries competing with China, to benefit from lower costs.

• The recent expansion of trade and investment with China is contributing to a decades-long shift in the structure of US employment away from manufacturing and toward services. We estimate that US manufacturing employment by 2010 will have been reduced by 500,000 jobs—equivalent to about 0.3 percent of the total US civilian labor force—but project this job loss to be offset by an equivalent 500,000 increase in US service sector jobs, in industries including distribution and financial services, by 2010.
• While this structural shift displaces some workers in manufacturing sectors and thus represents a real cost to workers in those sectors, the economy as a whole will benefit from the permanent output and price effects of increased trade with China. The overall impact should be a continuing, and increasing, positive boost to US output, productivity, employment, and real wages.

Effects on overall US trade flows:

• The bilateral imbalance with China cannot, by itself, explain the recent deterioration of the overall US trade position.
• While the bilateral trade imbalance with China has been rising dramatically in absolute terms, China’s share of the overall US current account deficit has remained fairly constant, at around 20 percent, for more than a decade.
• The increase in China’s share of US imports from 2000 through 2004 was offset by declining shares of other East Asian exporters, reflecting a profound shift in production patterns by Asian and other multinational firms operating in the region.
• The growth in Chinese exports to the United States since 2001 is partly the result of an increase in foreign investment in China associated with its World Trade Organization (WTO) entry, rather than any major change in the treatment of those exports under US trade policy.
• As a result of its booming import demand, China was one of the main locomotives of global economic growth in the years spanning the recent global recession—China’s import growth over the 2000–04 period contributed more than any other country’s to global import growth. China’s demand thus stimulated export growth among its trading partners, including the United States.
• US sales to China have constituted the fastest-growing segment of US exports in recent years.
• When China joined the WTO in 2001, it confirmed the message it had been sending to global investors about its commitment to a program of economic reform and opening.
• Without such a commitment, OEF estimates suggest that US-China bilateral trade flows would have been substantially smaller—Chinese exports to the United States would have been some $90 billion lower than they were
  in 2005, while its imports from the United States would have been some $10 billion lower. So the US bilateral trade deficit with China was some $80 billion larger in 2005 as a result of China’s economic reform program. However, our model suggests that most of the extra US imports from China displaced US imports from other East Asian trade partners.
• In spite of the rapid growth in its exports, China’s overall current account surplus in 2005 is still smaller than those
  of Japan and Germany, while its bilateral trade surplus with the United States is smaller than that of the Middle East/North Africa region.

Download The China Effect: Assessing the Impact on the US Economy of Trade and Investment with China

PDF format, 158KB, 27Pages.

A Report by Oxford Economics and The Signal Group
The China Business Forum

About the Authors

Erik Britton, project leader, is director of Economics at Oxford Economics, one of the world’s leading providers of economic forecasting, analysis, modeling, and advisory services. Oxford Economics supplies a range of “off-the-shelf” products and services in addition to customized economic consultancy services.

Britton joined Oxford Economics at the start of 2000. Since then he has assumed a wide range of macroeconomic forecasting responsibilities and undertaken consultancy projects for clients around the world, in both the public and private sectors. Brittion joined Oxford Economics from the Bank of England, where he was responsible for running the UK macroeconomic forecasting model, then for coordinating the international forecast, and finally for managing a
team of economists undertaking research into the economics of the corporate sector. Before that, he worked for a small consultancy in London, MMD Ltd, which applied the quantitative methods and tools of economic analysis to the problems confronting businesses.

Britton graduated from Magdalen College, University of Oxford, in 1988, with a degree in Politics, Philosophy, and Economics. He holds an MSc in Economics from Birkbeck College, University of London.

Christopher T. Mark, Sr. is chair of The Signal Group, LLC (www.chinasignals.com), a specialized consultancy providing competitive intelligence and strategic economic assessments for clients operating in China and other emerging markets; it has offices in Princeton, New Jersey, and Shanghai, China. Mark was, until 2005, a senior economic analyst with the US government, responsible for preparing assessments on China for the president of the United States and other senior decision makers. During 30 years of federal service, he served as an international economist at the US Treasury Department; as Assistant US Treasury Representative in France; and as a member of the US Delegation to the Multilateral Trade Negotiations, where he was involved in developing the international accords that became the dispute settlement provisions of the World Trade Organization.

He is a graduate of Oberlin College and Princeton University, where he was Winston S. Churchill Fellow in International Affairs.

About the China Business Forum

The China Business Forum, Inc. (www.chinabusinessforum.org) was established in 1987 by the US-China Business Council to promote broad-based policy discussion and greater understanding in both China and the United States of the economic systems and business methods of each country and of the role of commerce in the overall relationship between the United States and China.

The US-China Business Council (www.uschina.org) is the leading organization of US companies engaged in business
with the People’s Republic of China. Founded in 1973, the USCBC provides extensive China-focused information, advisory, and advocacy services, along with comprehensive events, to nearly 250 US corporations operating within the United States and throughout Asia.

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