Gordon Brown, Britain's chancellor of the exchequer was recently in Beijing talking up export possibilities in education and technology, reminding his fellow countrymen of China's new importance in the scheme of things. Bertie Ahearn, the Irish prime minister, came to China just before Brown, speaking in a similar vein. Before him, Canadian Prime Minister Paul Martin came by in late January and said China had become his country's second largest trade partner in 2003.
Martin offered an example of how quickly relationships can change. Canada-China trade jumped from C$5bn (US$4.06bn) to C$25bn in 10 years, he told a Canada-China Business Council meeting in Beijing, "In fact our trade increased by another 50% last year alone."
Relationships have been changing in Asia, too. China last year became Japan's biggest trade partner, displacing the US as Japan's leading source of imports. Exports from China, excluding those from Hong Kong, totaled 6.31trn yen (US$50.9bn) in 2004's January to October period, surpassing 6.04trn yen in exports from the US, according to Japan's Ministry of Finance. With shipments of PCs and other electronics leading the way in November and December, Chinese imports were set to surpass US imports in value for the first time since the ministry began compiling statistics in 1961, according to Nihon Keizai Shimbun.
Australia, now a major source of iron ore, oil and gas and other commodities, has watched its trade with China more than treble since 1997. Two years ago, Australia began a feasibility study in hopes of finalizing a free trade agreement with China this year. "China's strategic position and influence in the world is expanding rapidly," notes a study group document. "Its economy is forecast to equal Germany's by 2010 and rival Japan's by 2030. China is an increasing influence in the global economy. Its rapid economic and industrial expansion are shaping international trade, investment and production patterns at the global and regional level."
China and other trade partners have launched similar initiatives in an effort to streamline bilateral relations – with the ASEAN bloc, New Zealand, Singapore, South Korea and the aforementioned Japan. Farther afield, it has been strengthening ties with South Africa and Venezuela, Brazil, Chile and others in Latin America.
All this activity raises China's profile, making it an even bigger target for China bashing as politicians, in the US most vehemently, complain about lost jobs blamed on a renminbi perceived as grossly undervalued. Stanford economist Ronald McKinnon (Q&A, page 13) argues America's trade deficit has more to do with meager American household savings and federal government debt than an undervalued currency pricing by the People's Bank of China.
It is natural for maturing economies to shed manufacturing jobs as more people are absorbed into services, he says. But sloppy bookkeeping has accelerated America's exit from manufacturing, which now employs 10.5% of the US labor force. By McKinnon's calculation, had the books been in balance and not weighed down by massive foreign borrowing, that figure would be closer to 14.5% today. Manufacturing employment is down from around 25% of the labor force in the 1960s, he says, and while it does not sound like much, the difference between 10% and 14% works out to perhaps 5m jobs.
Put another way, the world population of China bashers might have been 5m smaller today. However big it is, it is less of a force than its Japan-bashing counterpart of earlier days, McKinnon thinks. He remembers watching – with some embarrassment, given his vantage point was Silicon Valley – how the US forced the Semiconductor Agreement on Japan. That effectively cartelized the chip industry, guaranteeing US producers a fixed piece of the action.
Free trade comes in strange guises. But Japan bashing gathered momentum after Japanese producers had succeeded in overtaking US steelmakers, machine tool makers, carmakers and electronics manufacturers in their home market. It was very concentrated, and devastating. Chinese exports are much more diversified, McKinnon argues. With the possible exception of textiles, "there is no one major industry severely impacted by it."
And because the US is less of a manufacturer these days, Chinese are in many cases displacing not American competitors, but other foreign producers. Besides these mitigating factors, so many American multinationals have shifted manufacturing operations to China that the corporate lobbying that might have occurred 10 or 20 years ago is inconceivable.
As China's economy grows, of course, industries will feel the impact, and anti-China sentiment will grow. Sound and sensible people in Washington and other capitals might use what breathing space is left to them to turn down the rhetoric about revaluing the renminbi and consider McKinnon's argument for widening the exchange band slightly to 1% either side of the RMB8.27:US$1, but otherwise leaving things right as they are.
If the People's Bank of China lets go, it will be 10 years of credibility-building down the drain, the economist says. McKinnon fears that a currency revaluation of any significance will almost certainly bring a marked slowdown – and it won't, if experience with Taiwan, South Korea and Japan is any guide, reduce America's trade deficit one iota. One outcome of a revaluation could be further delays in efforts to lift China's interior provinces out of poverty.
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