US President Donald Trump has made closing America’s trade deficit with China a top priority. The problem is, it’s growing instead. For Trump, that’s probably more proof that his tariff-heavy, get-tough approach to China is the correct strategy. For economists, it’s not such a big deal. The US economy is roaring, and roaring economies tend to import more.

There’s another reason, too, that the trade balance is the wrong figure to focus on. It only captures one part of the greater economic relationship between the US and China -- and only as that relationship currently stands. Fixating on it distracts from what ultimately counts: US corporate competitiveness and profitability.

To understand why, consider some new Oreo flavors. In August, US snack food giant Mondelez International rolled out hot chicken wing- and wasabi-flavored versions of the classic American cookie. Not quite to your taste? Well, they may not be aimed at you. The new cookies are being sold only in China. More than that, they were developed at Mondelez’s research center in Suzhou and are produced by factories on the mainland. Mondelez launched the new entries on JD.com, a Chinese online retailer. (The first batch sold out in nine hours, according to Mondelez.)

There are many such examples of US companies localizing their operations to target the Chinese market. General Motors manufactures nearly all the cars it sells in China within the country. It even has a car brand, Baojun, developed for and only marketed to Chinese drivers. The vast majority of what Procter & Gamble sells to Chinese consumers is made locally. The company boasts nine manufacturing plants in China.

Such sales don’t directly factor into the bilateral trade data. Yet it most certainly adds to those companies’ bottom lines. GM and its partners sold 1 million more vehicles in China than in the US last year. China is P&G’s second-largest market after the US. Only Americans eat more Oreos than Chinese do.

The local sway of US companies is an indication of just how sophisticated and global they’ve become. With appealing brands and extensive international expertise, American firms very often invest and manufacture in foreign markets instead of exporting their products from the US. By contrast, Chinese companies, like those in emerging markets generally, tend to lack brand power and experience operating abroad. So they capitalize on their low-cost base to export to the US and elsewhere.

That’s reflected in the great disparity of direct investment between the US and China. Since 1990, US companies have invested almost twice as much in China -- $256 billion -- as Chinese companies have in the US. And a huge chunk of China’s investment has been made in only the past two years. To a certain extent, the trade deficit is thus a mark of how much more advanced US corporations are compared to their Chinese counterparts.

Of course, there’s been much hand-wringing over the loss of American jobs due to trade with China as factory work has shifted overseas. But in many cases, the plants constructed in China were not replacements for those in the US; they were built to meet local needs. In certain industries, such as P&G’s household wares, shipping from far-off locales is expensive and impractical.

Fortunately, economies are never static and, over time, the disparity between the US and China should narrow naturally. It is almost certain that, barring a complete collapse of relations between the world’s two largest economies, Chinese companies will expand their presence in the US market and hire American workers as they become more global.

As Japan’s share of the US auto market increased, for instance, so did its investments in the US. Japanese automakers have by now built 24 factories and invested a cumulative $48 billion in manufacturing in the US. A trade spat between Washington and Tokyo played a role, persuading the Japanese to impose voluntary quotas on car exports in order to reduce tensions. That suggests Trump’s tougher tactics on trade may also spur more Chinese investment in the US (though so far, that hasn’t happened).

But trade restrictions probably aren’t necessary. As companies of all types see their presence in a market expand, it just makes good business sense to get closer to their customers. South Korean automaker Hyundai opened up a US factory, as did its affiliate Kia, even though Washington and Seoul didn’t fight a trade war. Automaker Volvo, owned by China’s Geely, also recently opened its first car factory in the US.

Such investments may not completely close the trade gap. (They haven’t with Japan.) But they’ll most certainly stimulate jobs and even exports. Japan’s automakers have directly created nearly 93,000 jobs in the US and last year exported more than 400,000 vehicles from their American plants.

There are lessons here for Washington policymakers. Though it is probably wise to restrict Chinese investments in sensitive US technology, they shouldn’t scare off Chinese capital entirely. Furthermore, reducing the trade deficit is a sideshow to what will truly help US companies -- expanding their ability to operate in and profit from the burgeoning Chinese economy.

Trump would be better served directly pressing Beijing to lift barriers to US business, rather than restricting trade and imposing higher costs on US companies and consumers. It is profits that matter, not deficits. 


Michael Schuman
Michael Schuman, who is based in Beijing, is the author of “The Miracle: The Epic Story of Asia’s Quest for Wealth” and “Confucius and the World he Created.” -- Ed.

(Bloomberg)