Trade. When Gov. Arnold Schwarzenegger traveled to China in November, he was only putting an exclamation point on what California’s business leaders already know: China is now one of California’s biggest markets, even while it emerges as one of California’s largest commercial competitors. California’s exports to mainland China increased 25 percent in 2004 to $6.8 billion and up nearly 50 percent since 2001, according to the California Chamber of Commerce. This was more than double the rate of trade in 2000. And while California companies sell software, computer parts, entertainment, wine, and almonds to Chinese consumers, California firms also face stiff competition from Chinese-made textiles, machinery, and even agricultural products. Pirating of software and videos within China is a well-known scourge, costing California firms billions each year. But even for mundane agricultural commodities such as garlic and apple juice concentrate, China is becoming a competitor in a direct sense, said Mechel Paggi, director of the Center for Agricultural Business at Cal State-Fresno. Paggi could be speaking about a host of relationships between California and China when he says, "This is a complex relationship that is developing. You have a difficult time sorting out the winners and the losers." For while California farmers send frozen strawberries to China, for instance, that produce sometimes comes back to California as dehydrated berries ready to be stuffed into American cereal boxes. In addition, as Chinese farmers learn how to produce their own fruits and vegetables more efficiently, they are beginning to squeeze California farmers out of other lucrative export markets, like Japan and South Korea. And cheap Chinese apple juice is putting the squeeze on some California producers of grape juice concentrate, Paggi says.

Because the United States runs such a consistently large trade deficit with China, the Chinese have to reinvest their surplus somewhere, and China’s central bank buys up an estimated $200 billion of U.S. Treasury bonds and securities each year. These purchases, in turn, have kept U.S. interest and mortgage rates surprisingly low, even as the Federal Reserve has boosted interest rates numerous times over the past two years, economists say. These low interest rates sustain the housing boom and offer more license to U.S. consumers to buy Chinese-made clothing and electronics.

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