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China-United States Economic Relationship

Page history last edited by Bob Andrian 8 years, 11 months ago

China and the United States in a Global Economy


In the words of former U.S. Trade Representative and current Chairwoman of the Council on Foreign Relations, Carla Hills, China and the United States are like twin engines on the aircraft of the 21st century global economy. Both countries need to realize that neither is the dominant power in the world. While many labeled the 20th century, the American Century, and while China enjoyed a long history of power in the world (17-18 centuries worth), the key to a stable and prosperous world order lies in Sino-American partnership and not confrontation. A multi-polar world does not mean that the U.S. should not voice its views on the values it holds dear, but it does mean that both it and China should not become involved in each other's internal affairs. Moreover, both countries, though at different stages of development in modern history, have significant internal challenges (some interconnected) that need to be addressed to insure their future health and status in the world's eyes. What are these realities in each country?


In drawing upon data about global competitiveness from the World Economic Forum and the Information Technology and Innovation Foundation, Fareed Zakaria notes that out of 44 countries during the period 1999-2011, China finished first in terms of improvement in innovation and competitiveness and the United States finished 43rd, just above Italy. China ranks 31st in the quality of math and science education; the U.S. ranks 51st.


Rather than facing a threat from or a clash of civilizations with an external power like China, the U.S. has the potential to "rot" internally for a host of reasons. These would include the following:


  • a growing level of poverty and inequality, now at 15%, which equals 46 million Americans; the "rich" seem to be in their own "subsociety" as Joseph Stiglitz calls it


  • lack of quality public education, which results in students spending more time texting and gaming then studying (Zakaria points out, for example, that Tom Friedman and Michael Mandelbaum in their new book, That Used to Be Us: How America Fell Behind in the World It Invented and How We Can Come Back, note that in 1981 California spent 10% of its budget on higher education resulting in an outstanding public university (UCal) system and 3% on its prison system. Today 11% goes to prisons and 8% to higher ed.)


  • decaying infrastructure and less government investment in infrastructure (not to mention research, development, and education)


  • dependence on fossil fuels and denial (by politicians) of the realities of global warming


  • changing nature of work and accompanying unemployment due to the information technology revolution


  • expansion of globalization, competitiveness and subsequent loss of jobs


  • lack of education for more skilled work


  • national debt and yearly deficits


  • instant gratification leading to overconsumption and lack of savings and investment (In the 1950s, "household debt was just 34% of disposable income; today it is 115%.")


  • lack of taxation and shared sacrifice (also no reformation of the tax code)


  • an ineffectual political system, paralyzed by partisanship (e.g., from 1955-61 only one time was a vote needed to end a Senate filibuster; in 2009-10, 84 votes were needed)


  • gap between politicians and public at large due to big money and power of lobbyists 


  • private financing of political campaigns (aided by the Supreme Court) vs. public financing to reduce the "privileges of fortune"


  • a need to open doors to more immigrants


  • a need to continue to fight discrimination


  • lack of "fairness" in society 


  • a belief that the rest of the world, despite our problems, is eager for us to lead (unipolar vs. mulitpolar world)


  • a need to use more "soft power"


Having enjoyed remarkable economic growth (at least 7% GDP) for the last 30 years, China nonetheless faces many daunting challenges as a result of that growth, including:


  • the need to consume more and export less


  • balancing employment and inflation (now at 6.5%, mostly the result of the recent stimulus plan)


  • rising expectations (and subsequent disillusionment if they're not met) of a growing middle class (23% of the population or about 243 million make up the "middle class."). Currently 1 million (20%) of college graduates are jobless. 


  • a growing gap between rich and poor, esp. city and countryside, but also in terms of education, health care, pensions,etc.


  • no private banking and thus a lack of micro-financing especially in rural areas (most public financing has been for infrastructure or hugh projects like the Three Gorges Dam)


  • lack of innovation and transparency in the economy and a legal system that protects assets


  • concerns about social stability, often the result of economic development taking priority over safety (e.g. bullet train and subway accidents); also land-grabbing from people to make room for urban development


  • an urban housing bubble (if you want an apartment in a city, you need to have started saving in the Tang dynasty); rampant speculation and shady loans in cities like Wenzhou (train crash) have brought this about. Some Chinese refer to Wenzhou as "very rich but without any money" having gone on a borrowing spree and now not being able to pay the money back.


  • environmental degradation (started with Mao, now much worse); also lax oversight on businesses "cutting corners," lack of laws protecting environment ("If you don't have to treat your wastewater, you can just dump it in the river next to your factory.")


  • concerns about political stability as inequalities continue, official corruption persists (especially at the local and provincial levels) and as the nation gradually moves towards a consumer economy. (The authoritarian political model seems to have worked during this long period of export driven growth.)


  • the implications of the one-child policy; by 2030, China will get old before it gets rich. The number of people over 65 will have increased 100%, between 55-60, 60%, and the number in their 20s will have decreased 35% according to present demographic projections. Thus there will be fewer in the work force, and they will have to care for the elderly at the same time.


  • intellectual property violations ("what's mine is mine, and what's yours is mine")


  • a counterfeit economy (black market for counterfeit goods)


  • social/political control issues such as internet censorship


  • human rights issues/treatment of dissidents 


  • increasing rates of crime 


  • the marketing of China's global image 


As we have seen in the video clips we watched from Ted Koppel's, The People's Republic of Capitalism, and Bob Woodruff's, China Inside Out, there are many important economic issues (some related to each other) that both China and the U.S. need to continue to work on. While it is true that the Chinese do need to "consume more and export less," the recession in the U.S. and Europe has clearly hurt Chinese exports. Chinese consumers cannot make up for the drop in exported goods (after all, per capita GDP at around $4,000 is one-tenth of what it is in the U.S.), and frankly don't want to end up in the same economic mess, the consequence of borrowing more than can be paid back. Recently the U.S. Institute of Peace held a "China Global Summit" to discuss a variety of economic issues. Let's look at a few of these.


1. Chinese investment in the United States: Funding the U.S. Debt


China has about $3 trillion in foreign exchange reserves, two-thirds of which is funding 17% of the U.S. debt. Whether or not one subcribes to former Secretary of the Treasury Robert Rubin's argument that the PRC has done the U.S. a disservice by supporting the dollar and funding the debt, thereby leading to abnormally low interest rates, the fact is that, as Patrick Chovanec, a professor at Tsinghua University's School of Economics in Beijing, asserts, the U.S. and China "are locked in a dysfunctional co-dependence. The U.S. consumes too much and saves too little, so it needs to borrow from China. China saves too much and consumes too little, so it has to lend to Americans to let them to keep buying what China produces." Therefore, China is not going to be dumping its U.S. Treasury securities anytime soon. It would be wise, as Chanovec observes, for China to reverse the capital flows and starting spending and investing dollars rather than saving them. In addition, despite criticism about the state of the American economy, many Chinese have confidence in that economy, precisely because it is more mature and developed than the Chinese economy.


2. Chinese investment in the United States: Helping to Create Jobs


As the International Monetary Fund has recently recommended in discussing how to rejuvenate a sluggish global economy, China needs to sell fewer exports and buy more of what the rest of the world sells. The trend, however, especially with regard to the United States, is for higher Chinese trade surpluses. If China's economic power cannot help create jobs in the U.S. by buying more American goods, (the result of consumers in China having more purchasing power and thus spending more and saving less), then that power can create jobs through direct investment in the U.S. 


On NHPR's "The Exchange," in late July of this year, the program topic, "China's Economic Footprint [in the U.S.]" revealed the extent to which Chinese companies have already become involved in setting up businesses in the U.S. In New York, Chinese investment in the city's commercial real estate has grown exponentially in the past year (over $1 billion in real estate loans from Chinese banks). China Construction America, a subsidiary of a state-run construction company in China, is one of the leading construction companies in the New York region. The same real estate investment trends can be seen on the West coast in southern California as this YouTube clip illustrates. In each case, Chinese-owned companies are creating and maintaining American jobs.



A ChinaDaily article also highlights the enthusiasm in Texas where a Chinese steel pipe company put forward a $1 billion project for the largest manufacturing investment to date in the U.S.


Complicating, indeed, inhibiting Chinese investment in the U.S. are very stringent visa restrictions, (not with student visas), the likely product of politicians who cannot stomach Chinese political ideology. Unfortunately, tourism and other potential economic and cultural benefits suffer. In 2010, for example, 750,000 Chinese visited the U.S.; during the same year, 1.1 million Koreans visited. China's population is 27 times that of Korea, but the Koreans do not need visas to come to the USA. Political differences and national security concerns, and American nationalism itself contribute to the Chinese investing less than 2% of all their foreign investment in the U.S.


3. Trade Imbalances


The current U.S. trade deficit with the PRC (through August) is about $189 billion, and should be at its highest level ever by the end of the year. (At the beginning of the millennium, the deficit was $20 billion.) It is important to remember that China's desire to keep its economic growth rate at 7% or more annually is not just a matter of maintaining jobs. It is the political and social fallout in terms of instability that worries the government. The global recession and in particular the U.S. recession resulted in many Americans last year, for example, cutting back on buying gifts made in China for the holidays. Thousands of workers in China lost their jobs as factories were forced to shut down.


Thus letting the Chinese currency, the renminbi or yuan, appreciate relative to other currencies, a practice that would make Chinese exports more expensive, is both a political and economic matter. (There has been progress in the revaluation of the renminbi, but it has been painfully slow as far as some American politicians and economists are especially concerned. Some estimates suggest that the yuan is undervalued by 40%, and while perhaps a bit high, the losers are not only a large amount of American workers, but also countries in Southeast Asia like Vietnam and Malaysia who are trying to sell their goods to the U.S.)


But trade statistics often don't tell the whole story of who wins and who loses as goods exchange hands. Indeed more than likely in today's globalized economy, even though something says made in China, was it made entirely in China? Take Apple's iPad. As a thoughtful piece in the ChinaDaily USA paper recently noted,


"For every Apple iPad sold in the United States, the US trade deficit with China increases by about $275. Yet by far the most value embedded in the device accrues to Apple and sustains thousands of well-paid design, software, management and marketing jobs in the United States. By contrast, the value captured in China by the labourers who assemble Apple's products is a mere $10 or so, according to researchers led by Kenneth Kraemer of the University of California, Irvine, who crunched the data. Viewed through this prism, offshore manufacturing of electronic products like the iPad is a solution, not a problem, for the United States, and seeking to punish China for its purportedly undervalued exchange rate is wide of the mark."  


Moreover, China imports all the components to assemble the iPad from Japan, South Korea, the European Union and the United States. So a good number of countries share in the surplus from iPad sales.


Beyond being a piece of protectionist legislation that would prompt some sort of retaliation from China and perhaps even a trade war, the Senate bill to create American jobs by slapping tariffs on Chinese goods because of China's failure to let their currency appreciate (and thus subsidize their exports), won't in fact create that many jobs. As the ChinaDaily article suggests, Chinese imports of manufacturing goods in the U.S. are beginning to slow because the yuan has already begun to gain in value. With Chinese wages beginning to increase, other countries in the region are benefitting from their cheaper labor costs as companies engage in the proverbial "race to the bottom." 


4. U.S. Investment in China


A recent USA Today article discussed a "second wave" of American corporate expansion in China beyond the original investments in China's largest cities to other cities farther inland. Improvements in China's infrastructure as well as greater internet access throughout urban areas in China have made continued U.S. private investment appealing. Companies like Walmart, Starbucks, and KFC (every 18 hours another KFC franchise goes up, so I am told) are all expanding operations.


The Asia Society's "China Boom" Project considers these and other issues and in both historical and cultural contexts. There are video clips that are linked to various threads of the discussions.



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