Today, the United States needs Chinese capital, while China needs US technology and know-how. Taking the US-Chinese trade to a new level is in the interest of both nations.

Since the early 2000s, the US trade deficit with China has caused increasing debates in the US. Last year, American exports to China reached $70 billion, while Chinese exports to the US were $300 billion.

But the deficit is a regional story. It has been typical to US trade with East Asia for decades - first with Japan, then with the Four Asian Tigers (Singapore, South Korea, and Hong Kong and Taiwan), and now with China. The product label may say "Made in China", but the simple reality is that about 50-60 percent of "Chinese exports" is actually trade by foreign multinationals operating in China.

Paradoxically, even high-tech products invented by US companies do not increase US exports. They exacerbate the US trade deficit. For instance, Apple's popular iPhone alone contributes $1.9 billion to the US trade deficit with China.

The implications are equally paradoxical. As China's trade partners seek to erect barriers against "Chinese trade", they are actually hampering the activities of multinationals headquartered in their own capitals.

The US deficit in merchandise trade with China is counter-balanced by its surplus in service trade. Before the global financial crisis, the US service exports to China amounted to $14 billion, while Chinese service exports to the US were $9 billion, that is, the US enjoyed a surplus of $5.4 billion.

Since the dollar value of service trade is significantly lower than that of merchandise trade, such figures are often ignored. Yet the service providers comprise leading US banks, financial institutions, law firms, insurance companies, travel agencies, management consultants, IT services, transportation companies, and medical and health services. From the US standpoint, service trade with China translates into high-income jobs and profits from investments in China, which, in turn, support investment and jobs in the US.

Conversely, China needs cutting-edge service capabilities as it seeks to move toward and increase productivity in high-value industries.

The US dominates the global technology sector. As a result - if one took macroeconomics textbooks and neoclassical trade theories seriously - one might think that the US exports to China know-how and high technology, while China exports to the US low-level technologies. Yet that is not the case.

In the 1980s and 1990s, Chinese exports to the US comprised labor-intensive products such as toys and games, consumer electronics, textiles and clothing, footwear and apparel. During the past decade, the key products reflect increasingly high-tech products such as computers, electrical machinery and equipment, and power generation equipment.

Such evolution is to be expected if one takes into consideration the shifts in China's industrial structure. But what about US exports to China?

Last year, the top five US exports to China were oilseeds and grains, waste and scrap, semiconductors and electronic components, aircraft and parts, and resins and synthetic rubber and fibers. In effect, China was the second largest export market for US agricultural, fish, and forest products.

Not surprisingly, some US analysts have expressed concern over the composition of US exports to China, noting that much of it consists of scrap products and components, as opposed to more high-value assembled products.

According to the Chinese viewpoint, US export controls on high technology significantly reduce potential US exports to China. In the aftermath of the global crisis, the US needs foreign capital for recovery and resurgence and China needs foreign know-how to sustain growth. In an ideal world, supply and demand would meet. In our world, they don't - at least not yet.

Although the US leads the global technology sector, it is not China's leading technology partner; Europe is.

China became the world's leading car manufacturer after Geely bought Volvo for $1.9 billion, which allowed Ford to focus on its core brands while emerging relatively unscathed from a recession.

The leading mobile handset maker in China is Nokia, not Apple or Motorola.

Boeing predicts that over the next two decades, China will be the largest market for commercial air travel outside the US. China is expected to triple the size of its fleet by buying 3,770 new aircraft, valued at $400 billion.

In effect, China could prove to be a much more significant market for US exports in the future. By the same token, it could play a far more vital role in the Barack Obama administration's goal to double US exports in five years.

But as long as only 7 percent of China's high-tech imports in terms of value are from the US, American technology leaders risk playing a secondary role in the world's fastest-growing large economy.

If the US relaxes its export controls on high-tech products, China would gain know-how that it needs for productivity, while the US would gain capital that it needs for employment.

Today, the weight of global GDP is shifting toward China and other fast-growing emerging economies while richer nations still face high debt and weak growth. The US' relationship with China will be the principal American challenge going forward.

"Our wisdom, their wisdom, the way in which we interact is going to be of the utmost importance," said Larry Summers, former White House National Economic Council director, recently.

Acknowledging facts is the beginning of such wisdom.

The author is the research director of International Business at the US-based India, China and America Institute and visiting fellow at Shanghai Institutes for International Studies

(China Daily 12/23/2010 page9)