Opinion

The Great Debate

China’s export dominance must force U.S. rethink

March 23, 2010

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.

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.” 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.

Comments
4 comments so far | RSS Comments RSS

A very persuasive article. But, with reference to your final paragraph, can a country that competes globally on the basis of cheap labour ever create the sort of vast consumer market that would buy (relatively) expensive American-made goods? China seems to be split into many pieces with vast numbers of peasants out in the western regions, leading lives of unimaginable poverty; exploited workers in the eastern regions making minimal wages for their work; an small entrepreneurial class living very comfortably a la Hong Kong; and a governing elite who are doing very, very well for themselves. Frankly, it remains to be seen whether this aging, sclerotic society will ever achieve the sort of consumer market to which Mr. Kemp refers. America may have to look for salvation elsewhere.

Posted by Gotthardbahn | Report as abusive
 

I don’t get it. It does seem that China has a vast and growing industrial base fueled primarily by cheap labor that will stay cheap for the foreseeable future due to a population of 1.5 billion people. In a way, this is the end game for US manufacturing, any company doing business with China is doing so out of desperation more then preference. There is no place else that is cheaper. If the US starts to export high end tech to China it will only serve to speed up the day when no US company can produce in the US. The only thing that can change this is if US consumers suddenly changed their preferences for high cost US made goods, but then it’s too late isn’t it, since there really are no consumer products made in the US. I guess if the World Trade Organization kicked China out it could slow things down a bit.

One thing that will be interesting to see is how China copes with a large population of dispossessed peasants who have been kicked off the land where they supported their families for generations hand-to-mouth, that and the simple fact that China has got to be facing astronomical environmental impact due to 20 or so years of high speed industrialization. Maybe it’s just me, but I can’t see how they can support 1.5 billion people in a heavily industrialized nation, and industry does not historically live in perfect symbiosis with dirt farming.

My chief concern is how we are expected to cope in the former industrialized world with no source of cash income, other than the possibility of a cushy job in the dwindling retail sector, law enforcement, government, or the military.

Posted by Billthedog | Report as abusive
 

Basically I agree with your article. It’s thoughtful and it’s well-written.

Even if it is a bit late in the day, some change in debate is called for, no doubt about that. Any sort of debate, really. That there doesn’t seem to have been one yet may be due to lack of mutually agreeable starting points.

Diehard free-market adherents probably reject out of hand the idea of the United States having to decide where it wants to go because it would imply having some sort of central vision, besides a basic ability to conceptualize which in and of itself seems generally lacking in today’s America.

But let’s say for the sake of argument all those “free” market gurus actually managed to get around one table and hash this thing out, what then?

Frankly, the current imbalance suits U.S. offshore manufacturers just fine. If they could get Americans to work like subhuman species in salt mines, deftly making consumer items that in their own lifetimes the workers could never aspire to afford, some say they might. By others, this consequence is waved away as unintended. In the meantime, the corporations have had a good run of it, even if it’s all about to grind to a halt per old Kruschev prediction.

Apparently, it’s not as difficult for average Chinese as for their American brethren to find peace with mass deprivation. Given a few more years of the weapons-grade mass unemployment currently metastasizing across the U.S., this sort of discrepancy in workplace attitude may eventually blur out, which some will identify as the long-term goal of American off-shorers all along.

The coming austerity in America wasn’t inevitable, which makes it only that much more painful to behold, though by no means as painful as listening to pundits blaming the MBS, health and credit crises on individual consumers…

Less easy to conceive of will be any incentive for the Chinese leaders to allow their people mutate from a nation of subservient plantation workers into a gigantic mass of extravagant gadget collectors, especially when the gadgets were made in Chinese labor camps to begin with. The incidental glory of having rescued the United States from an ongoing inability to export anything to anyone besides war paraphernalia and pitiful financial excuses probably isn’t quite gonna do the trick. Think George Bush Senior and the Japanese Premier’s lap – didn’t work there then, ain’t gonna work here, now.

Honestly, would you buy mass amounts of high-technology bric-a-brac you don’t even need from a country of geniuses who apparently couldn’t see this massive imbalance situation coming a mile off? I know I wouldn’t.

Posted by HBC | Report as abusive
 

Well, the average view of an American is that he is fat lazy and greedy. A really bad combination. I’m sure that isn’t all true. Perhaps the truth is more complacency due the the fact that they thought their well being was a right. Because it was written on a piece of paper. A long time ago. But the American constitution means nothing to a neo mercantile elsewhere. To fix this the American people are going to have to change their identity. To a people that thrive under pressure, think out the box, leverage their own intelligence (you know, like in the movies). America is a nation that was build on character and values. Unfortunately, that doesn’t always get you the contract or tender (Ask me, I live in Africa). Throughout modern history America has had an influence. If they did not fight in Korea and Vietnam who knows where communism would draw its boundaries now. We owe America much. I’m rooting for you.

Posted by creigh | Report as abusive
 

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