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Note: This article is drawn from a Hinrich Foundation White Paper entitled “A Profitable Partnership Under Stress: Why it makes sense to ratchet-down US-China trade tensions”. The white paper is based on an extended research effort undertaken by the Hinrich Foundation, which included interviews with scores of MNC executives doing business in China, as well as an analysis of publicly available financial data for 22 MNCs with substantial business operations in China. Our objective is to provide a firmer factual basis for a discussion of the US-China economic relationship. Download the full white paper report here.

Discussion within the United States on the US-China trade relationship is all too often focused on the size of the US trade deficit and perceptions about job losses correctly or incorrectly attributed to import competition from China. What seems to get lost in the conversation is the extent to which the China market has become an increasingly important place for US companies to sell their products and services.

For US and other foreign companies, China’s economic opening to the world, which began in 1979, provided access to a massive market which was initially attractive as a low-wage export processing platform but now has become an increasingly affluent consumer market in its own right. US companies today are in China to serve the Chinese market, in addition to (and in some cases, even more so than) simply manufacturing things to be sold elsewhere.

Although per capita income levels continue to lag far behind the US (approximately one-seventh the US), China is getting richer. And given the immense size of the population and its rising middle class, China now constitutes a leading global market in a number of critical consumer sectors.

In short, the bottom-line for an increasing number of US companies is less dependent on what Mr. Jones is buying in Baltimore and more dependent on what Ms. Wu is buying in Chengdu. And this is true in product categories ranging from sneakers to cars, and everything in between.

It’s not hard to imagine why foreign businesses need China based on market size alone. In 2015, China’s middle class surpassed the United States for the first time, according to the 2015 Credit Suisse Global Wealth Report. The report classifies a middle class adult in the US as having wealth over US$50,000, whereas the cut off in China was lower at US$28,000. But with over 109 million middle class consumers, China is a prime target for businesses everywhere.

The pockets of Chinese consumers are also getting deeper. In 2016, the nationwide per capita disposable income of all Chinese residents increased 6.3 percent from the year before. This means Chinese consumers now have more money to spend on goods and services, which was reflected in total retail sales last year.

According to the National Bureau of Statistics of China, retail sales of consumer goods increased 9.6 percent in 2016, hitting nearly US$4.8 trillion in total sales last year. This tops the 2015 retail trade numbers for the United States, where total retail trade stood at just over US$4.7 trillion, according to estimates from the United States Census Bureau.

Chinese shoppers are also increasingly turning to the Internet to buy consumer goods. Online sales in China increased a whopping 26.2 percent in 2016, as Chinese consumers bought over US$750 billion worth of consumer goods online. This far surpasses US consumers, who bought only US$340 billion worth of retail goods online in 2015.

Given China’s growing middle class with increasing incomes, skyrocketing retail sales and potential online retail growth, it is no surprise that foreign companies would target the Chinese market as a prime location in which to aggressively expand. And with each credit card swipe or WeChat payment from a Chinese consumer, foreign companies are growing increasingly dependent on profits from the Chinese market.

 

Download full white paper report

Authors

Stephen Olson – Research Fellow at the Hinrich Foundation.

Lauren Kyger – Research Associate at the Hinrich Foundation.