U.S. Trade Deficit With China Will Reach $28 Billion This Year, CIA Says : Economy: In report to Congress, agency notes imbalance is now second only to that between America and Japan.


The CIA predicted Friday that the U.S. trade deficit with China will grow to $28 billion this year, bolstering recent predictions of senior Clinton Administration officials that China is fast closing in on Japan as America’s leading trade problem.

In its annual report to Congress on the Chinese economy, the CIA noted that China’s exports of labor-intensive goods such as toys, shoes and clothes--which have increasingly filled the shelves of American discount chains and retail stores--are now being augmented by new sales of medium-technology products such as telephones.

At the same time, while American companies are having trouble increasing their exports to China, Japan’s sales in the world’s most populous country have been shooting up rapidly, the CIA found. Like the United States, Japan had a trade deficit with China, but it was much smaller--$3.3 billion in 1993.


At a hearing Friday, Sen. Jeff Bingaman (D-N.M.) termed the existing U.S. trade deficit with China “unacceptable. . . . It is growing faster than that with any other trading partner.”

If current rates of increase--more than 20% a year--continue, the trade imbalance with China will reach $40 billion by the presidential election year of 1996. The U.S. trade deficit with Japan has been running at annual levels of $50 billion to $60 billion.

“They (China) have learned the wrong lessons from Japan, frankly,” U.S. Trade Representative Mickey Kantor told The Times last month.

The Clinton Administration is now engaged in trade talks with China aimed at resolving disputes over such issues as China’s pirating of copyrighted software, tape recordings and movies. These violations of intellectual property reduce levels of U.S. exports to China.

So rapidly are Chinese goods taking hold in the U.S. market that shoes and sneakers made in China accounted for 40% of all imported footwear last year, up from 30% in 1992. About half of all the luggage imported into the United States in 1993 came from China, as did nearly 40% of all the toys, games and baby carriages.

But CIA specialists on the Chinese economy pointed out that, if China, Taiwan and Hong Kong are lumped together, the increase in the trade deficit does not seem quite so dramatic. The reason is that, as Hong Kong and Taiwanese companies transfer their factories to China to take advantage of cheaper labor, the U.S. trade deficit with these other jurisdictions is reduced while the imbalance with China goes up.


“Much of China’s success in the U.S. marketplace is due to the relocation of manufacturing facilities from other rapidly developing regions in Asia to China,” said Martin Petersen, CIA director of East Asian analysis.

In the seven-year period from 1987 to 1993, the U.S. trade imbalance with China increased by 700%. But the deficit with what is now commonly called “greater China”--the amalgamation of China, Hong Kong and Taiwan--was up by a much more modest 20% in the same period, Petersen said.

The CIA report, released Friday by Congress’ Joint Economic Committee, pointed to a major change in China’s economy last year: Japan, in past years a reluctant, cool partner in economic relations with China, has begun dramatically increasing sales and investment there.

In 1992, China was Japan’s fifth-largest trading partner. But in 1993, it shot up to second on Japan’s list--behind the United States--primarily because of a huge increase in Japanese exports to China.

Japan’s sales in China shot up by 45% last year, to $17.3 billion. Some of this increase was linked to exports of steel and iron, which more than doubled as Japan rushed building materials to help support China’s boom in construction.

In contrast with Japan, the United States increased its exports to China by a much smaller amount, 17%, to $8.8 billion, with airplanes and cars making up the largest share of the total.


The CIA said Japan’s foreign aid to China helped support the increase in its exports. China is now the second-largest recipient of Japanese aid in the world.

“Although these credits are officially untied (that is, not made conditional on the purchase of Japanese products), Japanese firms usually perform the feasibility studies for the credits, giving Japan an advantage in the bidding process,” the CIA concluded.

Japan’s exports to China were also helped by a nearly 60% increase in Japanese investment in the country last year. The CIA said new projects funded by Japanese investment probably helped increase Japanese sales of machinery, boilers and appliances.

The CIA also reported a huge increase in overall foreign investment in China last year.

It said China absorbed about $26 billion in foreign funds in 1993, compared with $12 billion or so the previous year. Joint ventures and other foreign-owned enterprises made up 11% of China’s industrial output last year and now employ nearly 10 million Chinese workers.