The U.S.-China trade agreement on Nov. 16 clears the last major hurdle for China to join the World Trade Organization (WTO) early next year. This will open the huge Chinese market to the world economy and strengthen both the truck equipment and truck freight markets in the U.S.
Joining the WTO was the impetus for Japan, other Asian countries and Mexico to begin a long period of rapid economic growth and trade expansion, which provided added demand to boost U.S. economic growth.
While transport equipment is already 20% of U.S. exports to China, it is almost all aircraft. Truck and trailer exports are now only about $30 million a year. China has agreed to cut motor vehicle import tariffs from 100% to 25% over the next few years.
China is already our fourth largest source of imports. But imports are six times larger than exports, producing a trade deficit of over $1 billion a week. China has agreed to end its non-tariff restrictions on imports and permit foreign companies to invest relatively unhindered in China. U.S. exports to China will at least triple over the next few years. Imports from China will probably double. Some of the added Chinese trade will be diverted from other countries but much of it will net new business.
The impact of access to the Chinese market on the U.S. economy will be larger than the impact of access to the Mexican market. The Chinese economy is eight times bigger than the Mexican economy when the NAFTA trade agreement began. The Chinese economy is 50% bigger than the Japanese and seven times bigger than the Canadian.
Freight carriers will see the impact in two ways. First, this is added assurance that the U.S. economy will keep growing at its capacity limit, providing steady and strong volume gains for carriers. Second, freight lanes and the freight mix will change.
Freight lanes leading to west coast harbors and airports will get added traffic, partially at the expense of other lanes. More motor vehicles, industrial equipment, high tech equipment, chemicals and farm goods will be headed west. More Chinese textiles, home goods, toys and gifts and electronics will be headed east. The U.S. manufacturers of these products will experience sales declines, layoffs and plant closures. This will especially impact the southeastern U.S.
This is a bold move by the Chinese leaders. China already has as many as 100 million workers unemployed or surplus in inefficient state factories or family farms. This number will grow as China trims down to become competitive in world markets. We will hear a lot in the next few years about social turmoil in China and bickering about trade and investment details between China and its trade partners.
But the Chinese appear to be firmly committed to this difficult transition. Since they abandoned Marxism in 1978, the size of the Chinese economy has quadrupled. But with the easy gains behind them, Chinese leaders have had to swallow their pride and accept the economic rules the rest of the world uses to assure that China can keep catching up with other countries.