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Why American Firms and Households Need China

Summary:
Bilateral trade statistics tell only part of the story of the Chinese market’s importance to the US economy. In particular, the availability of cheap imported goods from China lowers prices not only for US consumers, especially low- and middle-income families, but also for US businesses, supporting job creation. NEW YORK – China will benefit from a normalization of its trade relationship with the United States, but it is important to realize that the same holds true for the US. When the US tech giant Apple recently slashed its sales forecast, CEO Tim Cook pointed to declining sales in China – where US President Donald Trump’s trade war is exacerbating the effects of a slowing economy – as a major contributing factor. Apple’s

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Bilateral trade statistics tell only part of the story of the Chinese market’s importance to the US economy. In particular, the availability of cheap imported goods from China lowers prices not only for US consumers, especially low- and middle-income families, but also for US businesses, supporting job creation.

NEW YORK – China will benefit from a normalization of its trade relationship with the United States, but it is important to realize that the same holds true for the US. When the US tech giant Apple recently slashed its sales forecast, CEO Tim Cook pointed to declining sales in China – where US President Donald Trump’s trade war is exacerbating the effects of a slowing economy – as a major contributing factor. Apple’s diminished performance highlights how important the Chinese market has become to the bottom lines of many US companies – and reveals the risks Trump’s protectionism poses to the American economy.

The truth is that Apple sells substantially more iPhones and iPads to the Chinese than US export statistics imply. Likewise, General Motors sells more cars in China than what is recorded in US export data – more, in fact, than in the United States and Canada combined. That is because these companies, like many others, operate in China and sell directly to Chinese consumers. Far fewer Chinese companies sell directly in the US.

Because US companies have increased their operations within China over time, bilateral trade statistics only partly reflect the Chinese market’s importance to the US economy.

From 2000 to 2018, US exports to China soared by 530% – far more than the 130% cumulative growth of US exports to the world as a whole. This was a direct result of the considerable and unilateral trade liberalization China has pursued after joining the World Trade Organization in 2001, including reducing its applied tariff rate from 30% before WTO accession to less than 6% today. Furthermore, approximately half of the imports into China are subject to zero tariffs if production is for the world market.

China’s rapid GDP growth boosted imports, but that growth was also facilitated by trade liberalization and other pro-market reforms. No country has dismantled more barriers to trade or undertaken more pro-market reforms than China over the last four decades.

China’s market-oriented reforms unleashed a wave of entrepreneurship and enabled private-sector firms – both domestic and foreign-owned – to thrive and, in many cases, to achieve faster growth than state-owned firms.

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