It Takes Two: Imports Increase as US Trade with Asia Grows

Asia China

In April of this year, the United States trade deficit sharply contracted 11%, due to a strong uptick in exports, a drop in foreign oil purchases, and a sharp reduction in automotive and auto parts imports as a result of the disasters in Japan in March. However, last week the US Department of Commerce announced that May saw a reversal in direction with the trade deficit jumping to its highest level in over two years. While two-thirds of this spike was due to a surge in energy imports, the trade gap with China jumped to its highest level since November. This example of extreme month-to-month swings in trade with Asia underscores the significance of imports from the Asia Pacific region to the US economy.

Among our top import sources over the last decade (countries where the total ten-year value of exports exceeded $150 billion), seven out of twenty were in the Asia-Pacific. Of these, China and India were counted among the top ten fastest growing import markets, ranking 2nd and 4th respectively. They join the oil exporting nations of Russia, Nigeria, and Saudi Arabia in the top five of this list (China and India contribute little to US energy imports).

The graphic below shows the 15 largest markets in the Asia Pacific over the past ten years, as well as the rate of growth in exports over the same period:

US Imports from Top 15 Asia-Pacific Markets

According to the US Department of Commerce, imports from the Asia Pacific region are up 79% since 2001, slightly less than the growth of US exports to the region over the same period. This reflects an increase in overall trade with Asia, especially compared with other regions such as the European Union, which only grew 40% in the same period.

While the US may be exporting more to the Asia Pacific than ever before, the trend continues of importing more than it ships out. In 2010 the trade deficit with Asia neared $370 billion.

US Trade Balance with Asia Graph

As the dollar value of the trade deficit with Asia has grown steadily from 2001 to 2010, it is often believed that this reflects an increasing burden on the US economy that is perilously deviating from the norm. However as World Trade Organization Director General Pascal Lamy noted, the trade deficit with Asia has remained “at something like 2 to 3 per cent of the United States’ GDP” for the past 25 years. In 2010 the US trade deficit with Asia amounted to 2.5% of its total GDP.

Despite enjoying trade surpluses with some Asia Pacific partners in recent years, and narrowing the trade gaps with important partners such as Japan, South Korea, and Taiwan, the unequaled bilateral trade deficit with China stands out. Reaching $273 billion in 2010, it is the largest trade deficit the US has held with any nation in its history.

While the “Made in China” label has become ubiquitous for American consumers, the case of China challenges the traditional notion that the total value of imports from a nation accurately reflect the true balance of trade and subsequent impact on the US economy. Because trade figures assume that imported products are produced in whole by the sending country, they allot the total value of an import to the country that sent it. In an age of globalized supply chains, this fails to reflect the value of the components sourced from multiple countries. As such, China may not benefit from exports to the US as much as the trade figures indicate.

A recent example of this is the popular Apple iPhone, as examined in a report by the Asian Development Bank Institute. Looking at the trade figures alone, imports of iPhones from China contribute $2 billion to the US-China trade deficit. However, while the final point of assembly for the iPhone is in China, the high-value parts are from elsewhere in Asia and the United States and Europe. According to ADBI, of the $178 wholesale price of the iPhone, only $6.50 of the value comes from the Chinese workers who put it together. Compare this to the $10.75 contribution from US-made parts and design, and that $2 billion deficit with China shown by the trade data is in actuality a $48 million trade surplus. Likewise, of the 41,000 total jobs associated with producing the iPhone, 14,000 are in the US. Those workers earned a total of $750 million—more than twice that of non-US workers.

Trade is not a zero-sum game where imports always represent net losses. Components from Asia, for instance, are important to American manufacturing. Disruptions in imports from Japan following the March earthquake and tsunami impacted factories in the US at a time when manufacturing is driving the nation’s economic recovery. Lower prices on clothing and consumer goods produced in Asia allow American consumers to spend more money on higher value domestically produced goods and services. While it is natural and important for a nation to want to increase its sales abroad, such is the goal of its trading partners as well. In the end, as attractive as China and India’s emerging consumer markets are to US firms, to the rest of the world, America’s markets are just as enticing.