When American businessmen were first invited to the Canton Trade Fair in 1972, there was patronizing talk of selling a billion aspirins a year to the downtrodden Chinese and perhaps buying a few T-shirts in return. Who could have conceived that, within hardly more than a generation, the US would be struggling under the yoke of a US$200 billion trade deficit with China? Not me for sure.
I reported on the fair back then for the South China Morning Post – and a fascinating event it was. It was hard to get a reliable telephone line out, and one man who did found himself in hot water when he was overheard talking loudly to his father in Taiwan. Another incautious visitor was harangued extensively after he sought to buy something with a fat wad of greenbacks. Remember the Cultural Revolution was still in full swing and the Nixon-Kissinger trip to China had only just taken place.
More than 12,000 people from 100 countries thronged the exhibition halls. A modest US$793 million worth of business was done – including the first ever-official contract with a big US corporation, when RCA sold China a satellite communications earth station. One of the browsing businessmen was chemicals group president Julian Sobin from Boston. He told me he was impressed with the price and quality of the goods on display but frustrated by the tariffs imposed on them by the US. Sobin would not be impressed now by the bi-partisan support among US Congressmen to slap a 27.5% across the board tariff on Chinese goods in the absence of a substantial revaluation of the yuan.
Warren Buffett, the 75 year-old oracle of Omaha who might be losing his touch, says the US deficit is a bigger threat to the economy than the gigantic federal budget shortfall or the black hole of consumer debt. Maybe so. But whose fault is that? In the 1950s, America’s share of world manufacturing was almost 60%, while exports did not matter much since the US also accounted for half of all world income. Also there was not much competition. In the early 1960s, 47% of foreign direct investment flowed into the US. The downward spiral was slow, via the Vietnam War and the Arab oil shocks of the 1970s followed by the emergence of a powerful Japanese export engine. Then came China, which has improbably turned itself into the workshop of the world.
Today the US slice of the world manufacturing cake is about 23%, its world income share has dropped to around the same level, and the country only attracts 10% of available global FDI. The US has not run a trade surplus since 1975. The problem is not new, it is merely a matter of scale. And even that is open to argument. China says the bilateral US trade gap last year was not US$201 billion, but closer to US$114 billion. They can’t both be right. Perhaps someone in Washington should look up the word entrepot and buy a decent abacus.
The discrepancy, in part, is there because the US Department of Commerce counts the full value of Chinese goods re-exported by Hong Kong as PRC exports, ignoring the fact that around 25% of the value of the goods is added in Hong Kong by way of further processing and assembly. The US makes the same error in reverse. All its own exports landed in Hong Kong are included in the Hong Kong column, even those that are re-exported to China. This is hardly a secret but not the sort of stuff that US senators want to read about.
Foreign companies or joint ventures generated almost 60% of the US$762 billion total exports from China last year. Many of them are American, selling straight home to groups like Wal-Mart, which imports US$15 billion worth a year of "Chinese" goods. Japanese, Korean and Taiwanese companies have also moved in factories wholesale – China is beginning to complain that neighboring countries get the profits, while they get the flak over the bloated currency.
One way for the US to cut its deficit is to step up exports; China wants to buy more than Boeing planes and soybeans. Specifically it would like some of the high-tech products currently embargoed because they could be used for military purposes.
The US hawks continue to squawk about unfair trading practices, hidden subsidies, exploited workers and currency obduracy. They could be missing the point. A highly original piece of research, from the World Bank of all places, claims the Chinese miracle is not built on cheap labor but on cheap money. It says the impressive productivity gains of the last two decades are based on massive investments in machinery, buildings, transport, energy, roads and ports.
The money for all this has been abundant and cheap. The Bank says investment has been funded by the retained earnings of state-owned enterprises, Chinese banks holding US$1.5 trillion in household savings, and the government. But buried in the research are some words of caution: the Bank believes employment growth has slowed dramatically in recent years, driving the inequality of incomes between the urban and rural population that has become such a concern.