China's rapid rise in Information Technology (IT) equipment production in 2002, and its growing trade deficit with the United States in this area, has spurred concern among many observers that America is losing its competitive advantage in high technology.
However, despite some seemingly ominous indicators, China's rise in 2002 may be due to factors that were unique to last year, according to Rob Valletta, research advisor for the Federal Reserve Bank of San Francisco. Furthermore, the alarming trade gap in IT products that arose between the United States and China in 2002 is already beginning to reverse, as corporate demand recovers and U.S. manufacturers re-assert their positions in worldwide markets.
Speaking at a panel discussion covering opportunities in China at the Supply Network Conference in San Jose last week, Valletta said the ratio of IT imports and exports between China and the United States swung dramatically in China's favor in 2002. Valletta noted that the increase in the deficit reflects a wider trend in U.S.-China trade, and that the imbalance is actually worse for other manufactured products than it is for IT equipment.
"In that sense, America's edge in manufacturing certainly is not being eroded to the same degree in IT products as it has been in other manufactured products," he said.
Nonetheless, U.S. IT exports fell by nearly $47 billion in 2002, down 11% from 2001, representing a huge blow to the American high-tech industry. In terms of the trade balance, the U.S. IT deficit with other countries increased by $17 billion in 2002 compared to 2001.
Significantly, the United States' bilateral IT trade position with China fell by only $7.2 billion in 2002, making China responsible for less than half of the increase in America's overall IT trade deficit for the year, Valletta noted.
"This is happening because there's a lot of outsourcing going to China, there's lot of money going over there, and the United States is not exporting as much to China as it used to," Valletta said. "I know many people are alarmed about this. You read stories in the paper about how our competitive advantage is eroding."
But the Federal Reserve's preliminary numbers for 2003 indicate that the situation is changing.
"In 2003, the ratio of IT imports to export with China is coming back down again," Valletta said. "That's because the United States' export performance in IT has improved significantly in 2003 relative to the last couple of years. So, to some degree, this trend may be reversing. Once worldwide demand picks up, U.S. producers of IT products will start to reassert themselves."
Other factors in China also contributed to the country's IT surge in 2002.
China specializes in consumer-oriented IT products, whereas U.S. firms play mainly in the corporate market, Valletta observed. The worldwide slowdown in IT spending mainly has been spurred by a reduction in business outlays.
In contrast, consumer spending has held up well. Thus, consumers in the United States continued to snap up IT products made by Chinese manufacturers in 2002, while businesses worldwide decreased purchases on U.S.-made IT goods.
"So part of this is the nature of the worldwide downturn and the position China was in in 2002," Valletta said.
China's moves to stimulate IT production through tax incentives, its stress on training more engineers, and its enhanced trade position also boosted its standing relative to the United States in the IT industry in 2002, Valletta added.
While there has been much discussion of China's threat to the United States in IT, Valletta stressed the opportunity the country's growth is generating.
"There are more opportunities in China than there were in Japan when Japan was main threat to U.S. IT manufacturing. So, the openness of China to foreign presence is a real asset to U.S. manufacturing," Valletta said.
Other members of the panel, representing Texas Instruments Inc. and Motorola Inc., said that China offers a major opportunity for U.S. semiconductor makers, despite some challenges.
"China's consumption of semiconductors is growing rapidly," said Larry Tan, vice president of sales and marketing for Texas Instruments Asia. "Semiconductors are going into notebook PCs, flat-panel monitors, cell phones, DVD players, and other products. Design decisions on semiconductors are being made in China by corporate management of multinational companies."
China's share of worldwide semiconductor consumption has reached 31%, Tan said.
Andy Winterbottom, vice president and director of semiconductor procurement for Motorola said U.S. companies must adapt to the unique aspects of China's business environment.
"China is uniquely challenging. To compete there, you need to adapt to the ways of the people and the culture and find things that resonate in China. By doing this, Motorola is succeeding in selling and in sourcing in China."