Trade between the two largest economies in the world, the United States and China, is important for the two countries as well as for the world economic recovery and stability. According to the U.S.-China Business Council, the United States has been doing very well in terms of exports to China. In the decade since 2000, the U.S. economy expanded 16%. However, during the same period of time, U.S. exports to China expanded 468%. According to the data collected by USCBC, South Carolina did an even better job expanding trade with China, with a much higher rate of export growth – that is 1,596%. In other words, South Carolina’s product market in China grew almost 16 times in the last ten years. If we take a closer look at the commodities sold from the Third Congressional District in South Carolina to China during the same period of time, the growth rate was 1,347%. For the Fourth Congressional District in South Carolina, the growth rate of exports to China was 1,524%. All this tells us that our exports to China have grown much faster and greater than the expansion of the overall U.S. economy.
Some of us may believe that the currency reform in China had an effect on the U.S. and South Carolina’s export growth to China. However, the reality is unable to support this belief. China stopped pegging its currency, yuan, to the U.S. dollar and began reforming its exchange rate mechanism in 2005. If we break down the decade into two periods of pre- versus post-currency liberalization in China, we get the following pictures.
The U.S. exports to China expanded 154% from 2000 to 2005, before yuan started to float. On the other hand, the US exports to China expanded only 123% from 2005 to 2010, after yuan started to appreciate against the U.S. dollar. In South Carolina, since the growth of exports to China involved a one-time factor in 2010, we will just look at the growth rate from 2005 to 2009 for the post-appreciation period. For the whole state of South Carolina, the growth of exports to China was 390% before the Chinese currency reform but was merely 39% after the yuan appreciation. For the Third District it was 317% before and 34% after yuan appreciated, and for the Fourth District 347% before and 42% afterwards.
The Chinese currency appreciation is not as an important factor in the U.S. exports to China as we thought. Furthermore, its appreciation seems not a factor in reducing the U.S. trade deficit with China, either. According to the statistics from the U.S. International Trade Commission and the International Monetary Fund, yuan has appreciated by more than 30% against the U.S. dollar since 2005. However, the U.S. trade deficit with China continued to grow another 35% from 2005 to 2010. It went down only in 2009 when yuan stayed virtually unchanged.
Expansion of international trade seems dependent more on other efforts, traditionally including knowing your markets, developing comparative advantage of your products, and particularly in doing business with China, nurturing a strong personal network – or what your marketing professor called guanxi – with the Chinese.