Financial Regulatory Forum

COLUMN – China’s export dominance must force US rethink: John Kemp

By Reuters Staff
March 23, 2010

– John Kemp is a Reuters columnist. The views expressed are his own –

By John Kemp

LONDON, March 23 (Reuters) – Managing the rise of China’s vast economy and healing the U.S. trade deficit will require a new willingness and capacity to boost U.S. technology exports at affordable prices. More importantly it requires a new language from policymakers and a new mindset.

In a recent survey of American businesses, the proportion who felt unwelcome operating in China had risen sharply, amid tense stand offs involving Rio Tinto and Google. But with U.S. legislators in full flag-waving cry about China as a currency manipulator, is it really surprising China is looking to become more self-reliant?

At the heart of the trade problem is the difficulty the United States (and other western economies) are experiencing in adjusting to China’s rise to superpower status in the 21st century. It is causing the same problems the rise of Germany, Japan and the United States itself caused for Britain in the 19th and early 20th centuries.

Until now most analysts have focused on destabilising military aspects of that competition and the need to prevent a re-run. But almost equally important were tensions in the industrial sphere.

China’s rise is also reshaping the world manufacturing base. Inevitably, it will leave some industries in North America washed up and uncompetitive, the equivalent of Britain’s rusting mill towns and shipyards. Rather than drawing up the dikes and hoping history will go away, the challenge is to develop export-focused industries capable of selling competitively into China’s vast internal market.

FULL SPECTRUM DOMINANCE

The U.S. economy is in deep trouble. Even a quick look at the trade statistics reveals that no conceivable adjustment of the exchange rate could hope to rebalance bilateral trade flows between the United States and China: * http://graphics.thomsonreuters.com/ce/US-CHINA-TRADE.pdf *

The charts show bilateral flows for various product categories last year, based on import and export declarations made to the U.S. Customs Service and compiled by the U.S. International Trade Commission (USITC).

The United States ran an overall deficit of $230 billion. U.S. exports ($65 billion) were swamped by more than four times as many imports ($295 billion). The country was a net exporter in only 10 out of 32 product categories. In eight categories, net exports were minimal (less than $1 billion). Only in agricultural products ($10 billion) and waste/scrap ($7 billion) did the nation record a significant surplus.

In contrast, China was a net exporter in 22 sectors, and a significant one with a surplus of more than $1 billion in no fewer than 17. China’s biggest surpluses were in computer and electronic products ($95 billion); miscellaneous manufactures ($33 billion); apparel ($26 billion); leather ($18 billion); and electrical equipment and appliances ($17 billion).

NOT CHEAP PLASTIC JUNK

The breakdown refutes the common characterisation of China as a low-value-adding economy exporting plastic consumer “junk” to the United States. In fact low-value added products (agriculture, scrap) are flowing from the United States to China. Trade the other way is more balanced. China is exporting plenty of high-value items (computers, electrical equipment, and other machinery) as well as the classic cheap goods for export (apparel and leather).

Many of those higher value products are being produced and assembled in China by western companies as joint ventures with local firms. Others are increasingly designed and built by Chinese companies (Haier in appliances, Lenovo in computers).

Products made in China account for a substantial part of everything American households and firms buy, from clothing to domestic appliances, computer equipment and peripherals. China’s manufacturing system is integral to outsourcing strategies of leading OECD manufacturing companies, as well as the availability of cheap consumer goods and business equipment throughout the western world.

Revaluing the yuan by a small amount (5-10 percent) is unlikely to make much dent when China enjoys such huge advantages in so many sectors. Revaluing it more substantially (20-50 percent) would ripple through the entire North American production and consumption system, triggering huge upheavals in both corporate organisation and relative prices.

Worse disruption would follow if the United States attempted to unilaterally revalue the yuan by imposing 25 percent tariffs, as some commentators have recently suggested.

STIFLING EXPORT CONTROLS

If the United States wants to boost its trade position, it will have to find a way to begin exporting high-value items rather than relying on farm products and scrap. The country is supposed to have a comparative advantage in high technology. It is never going to make money exporting basic raw materials.

But as China’s powerful Commerce Minister Chen Denming pointed out recently, exports of a wide range of technology products are still tightly controlled. Not just high-technology items with obvious military uses such as super-computers but a vast range of “dual use” items (including ordinary computers and software) classified as dual use because they might have military applications. Other exports are banned on ill-defined “competitiveness” grounds.

At the moment the United States wants to sell China only low-tech innocuous goods it can already produce for itself. Even the iconic American branded goods where the United States has a cultural advantage are more likely to have been manufactured in other emerging markets or China itself, so will not do much to close the trade gap, or create American jobs.

COMMERCE CONTROL LIST

The U.S. Bureau of Industry and Security (BIS) maintains a voluminous Commerce Control List (CCL) requiring pre-clearance for exports including nuclear materials, chemicals, materials processing equipment, electronics, computers, telecoms and security equipment, sensors and lasers, navigation and avionics, marine, and propulsion systems, and extending to software and technology associated with these categories.

The Bureau notes, without apparent irony, items not on the list that may be freely exported “generally consist of low-technology consumer goods.” Trying to sell those to China is like selling coals to Newcastle; China is more than capable of producing them for itself.

China is subject to export controls under no fewer than 11 separate provisions of the CCL out of a maximum 16 (marked by X’s in the CCL table). The Bureau laconically warns exporters: “There is a direct correlation between the numbers of “X”s applicable to your transaction and the number of licensing reviews your application will undergo.”

Germany, the United Kingdom and Turkey are subject to just four each. Syria has 12, only one more than China.

REDEFINING CHINA AS MARKET

President Barack Obama made doubling U.S. exports a priority for his administration in his State of the Union address. But his soaring call to action is not matched by much more than a demand for China to adopt a “more market-oriented exchange rate” and a fuzzy call to “rebuild our economy on a new, stronger and more balanced foundation for the future.” [ID:nN10146021] It will take more than this to double U.S. export earnings.

The United States has to decide what it wants to export and then clear away the obstacles. If it wants to capitalise on its undoubted prowess in high technology to win export markets in East Asia it will have to accept the diffusion of products and know-how that will in turn increase the technical base of countries it currently sees as military, commercial and political rivals.

If the administration is serious about doubling exports, it will have to change the terms of the debate and confront head on the military-industrial Cold Warriors. Rather than portraying China as a dangerous future rival to be kept in its place, deprived of cutting edge technology, labelled a currency manipulator and harassed with antidumping duties, China will have to be rebranded as a vast consumer market crucial for future U.S. prosperity. ((john.kemp@thomsonreuters.com; reuters messaging: john.kemp.reuters.com@reuters.net; +44 207 542 9726))

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