Posted tagged ‘trade balance’

China And Trade

March 25, 2018

President Trump, in his best populist demeanor, announced massive import barriers on China. The President pointed to the $300+ billion annual trade deficit as justification. The President demanded China decrease the deficit by $100 billion as a first step. Sounds straight forward. Why are so many economists worried?

China is a huge country with over a billion citizens. Reports indicate that of that one billion, 400 million Chinese possess US middle class buying power. This should be a ready made market for American made products but the trade deficit shows otherwise. Why?

First, lets look at the top 10 US imports from China.

1. Electronic equipment: $150 billion (think Best Buy, Home Depot, portable drills, saws, vacuums, etc)
2. Machinery: $112.4 billion
3. Furniture, lighting, signs: $34.8 billion (think Pottery Barn etc)
4. Toys, games: $26.7 billion (think Amazon, most Department Stores)
5. Plastics: $17.6 billion
6. Vehicles: $15.6 billion
7. Knit or crochet clothing: ($14.9 billion (sweaters at Macy’s etc)
8. Footwear: $14.8 billion (Shoes and Running shoes)
9. Clothing (not knit or crochet): $13.5 billion (shirts, pants, hoodies at Walmart, etc)
10. Iron or steel products: $12.4 billion

What is it that makes this list of over $400 billion so attractive to American consumers?

Can you tell me the band name of one Chinese TV, vehicle, piece of furniture, toy or shoe, or piece of clothing? Almost certainly you cannot because the importers are American businesses which have outsourced the production of these items to China. Why? Because Chinese production costs less than “made in America”. And as a result US inflation rates are still very low.

This is an odd situation where Chinese business are not selling their brands in the export market. Chinese exports carry global brand names like Izod, Black & Decker, or Pottery Barn, and are exported to fill direct orders by US companies. So attempting to punish Chinese business for what US businesses have requested does not seem a wise and begs for unintended consequences.

But there is another face to Chinese trade. Is the Chinese domestic market open to US exports on the same basis that the US market is open to Chinese imports?

Unfortunately, the answer is no. The standard Chinese rationale has been that China is a developing market and needs to protect some parts of its economy so China can “catch up” to the developed countries. Tariffs have been the “go to” technique to provide local business owners time to develop competitive counter offerings. But with China (and also Korea), the understanding of intellectual property is quite different than the view in the West.

For example, US automobile companies face stiff tariffs on imported US made cars and trucks. Chinese officials insist that these automakers establish a presence in China in order to sell in China. (This is similar to what the US asked of Japanese car makers.) But there is a twist with the Chinese.

Automobile companies found that they could not get a license to manufacture unless they form a joint venture with an approved Chinese company. China also limited the amount of sub-components that could be imported for the assembly and sale of an American brand automobile in China. This provision was intended to require the auto maker to build, for example, stamping (the frame and skin of an automobile) plants, or buy from an existing Chinese stamping plant. Auto makers soon found Chinese made cars (under a Chinese makers name) running around China that look an awful lot like western cars. These Chinese auto parts companies just made more fenders and hoods than were ordered and sold the extras to a different Chinese assembly company who in turn assembled his own car. This, in Western terms, represents intellectual property theft.

So what are the consequences of getting tough with China?

China is still developing its economy and unfortunately is not going to leave unprotected certain industries. Automobiles, computers, solar panels, etc will present constant threats to intellectual property theft and protectionism regulations. Negotiations, especial through the WTO are in the long term the wisest path. Some day other countries will impose trade restriction on Chinese firms and China will feel economically the dangers its current policies have upon the US.

The US has instead chosen to levy tariffs which will increase the cost of products the US imports from China, thereby increasing the cost to US customers. China does not pay the duties, the importer does.

Ironically, the approach President Trump is following could have the consequence of raising wholesale prices on a broad section of goods and services without any increase in US sales to China. And should China elect a “tit for tat” response, American sales to China could decrease.

A bully knows only one approach. Threaten to punch the other person in the nose and expect the other person to bend to the bully’s demands also carries risks. China is unlikely to roll over to this approach and in a trade war, both sides normally lose.  Why would the President continue this high risk approach?

President Trump has his legal problems (with Stormy et all), the continuing Mueller investigation, weakening international relations (after killing the TPP, Paris Climate Agreement, and continuing to insist upon the “Wall”), and now he seems set to take on North Korea and Iran (with his new NSA and State Department Secretary. For someone who loves chaos, trade with China could distract Americans from Trump’s other unforced errors.

For sure, President Trump will have plenty to tweet about. I wonder whether he will notice the rest of the world’s friendship melting down around him?

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Traveling in China

July 4, 2010

I recently visited three Chinese cities with a combined population of 45 million (but who is counting). The cities were Beijing, Xian, and Shanghai. This is hardly a thorough sampling of China, and for sure, other parts hold cultural insights that vary considerably from these cities. Never the less, these cities do represent where China is headed and offer important insights and lessons about the China that is emerging.

China is rapidly growing wealthy and becoming a modern country. With an estimated one and a half billion people, this is an amazing accomplishment considering where it has come from. Cities are bursting with excitement and energy. The Chinese seem almost impatient to find a better living standard and are willing to work for it.

China is a very interesting place to visit. Its history will surprise most Americans. But in terms of modern nations, the current version of China is still a young and developing country. America can (and should) not take China for granted. Keeping stability within its boarders while China learns how to manage its capitalist system for the masses and finds the right compatibility with its political systems, is a work in progress. Measuring China by our American history, culture, or expectations is a serious mistake.

Here are some considerations:

  • The lives of people are visibly getting better everyday. While in comparison to the west, the average Chinese is poor and must work hard to get by, their standard of living is rising very quickly. The national growth rate of 10-12% is fueling this surge and the large export imbalance to the west is a big part. Messing around with China’s exports, one runs the risk of angering a very large population when the economy suddenly stops expanding.  While the huge trade imbalance must be reduced, China, itself, must play the key role in managing the reduction.
  • There are so many people in China, particularly in these cities, that one must wonder how goods and services get distributed. There are literally dozens of venders where ever one looks, selling everything from bottled water to ice creams to whatever. Each is supplied by someone who in turn is supplied from someone else. This is free enterprise at its fullest strength. You can smell the ethic of “no work, no pay”. If the economy is suddenly jolted (like what happened in the US in 2008 and 2009), there could be a lot of people without work, and no one knows what they would do with their frustrations.
  • Cell phones and cameras are everywhere. Book stores and bars with televisions dot the main streets. All of this is in the hands of the young (teens and 20’s). Information is flowing and were it to stop, there would be trouble. To be sure, not all information is contained in what is widely available but somehow, the young find things out. Life is good so there is no complaining about government censorship. Instead there is just bewilderment, “why?” If the economy stops growing, the younger generation will ask “why”.
  • There is new building growth everywhere. The scope of the 2008 Olympics and the 2010 World’s Fair are staggering in terms of government investment (over $100 billion). Housing units and new roads are going in all around. Subways are being build as fast as they can in both Beijing and Shanghai. All this provides jobs and a better life for many. An expanding economy funds this growth.
  • The air is thick with smog. From an airplane one can see that smog does not confine itself to just cities. It is everywhere. Coal which is plentiful and inexpensive accounts for much of the smog in the process of producing electricity for the China dynamo. Cars contribute a sizable position to smog production by the shear fact that Chinese are now able to buy cars (and are delighted to do so) in greater numbers each year. How will the government deal with smog which in the end is a health hazard but originates from activities that are making the Chinese citizens enjoy a better quality of life?

Riding herd over this sprawling country is no easy matter. China’s one party system has over seen a masterful job of modernizing the country during the past 25 years. The question is “can they continue or will they become distracted”. In the ideal, benevolent dictatorships promise the most efficient form of government. Unfortunately, they usually fail when the leader or leadership change and are replaced by ineffective or despotic leaders.

There is no way to predict how the next 25 years will proceed. China cannot sustain the growth rates they have now forever. How will their system of government handle the social unrest that will undoubtably occur when growth slows (or worse contracts severely). How and when will they prepare their population for slow growth days?

The answers does not lie in a larger dose of western democracy. It probably does lie in how the bulk of the population handles change (slowness as well as growth). It also must include evolution of their political process to handle leadership that is less effective and needs to be replaced. A back slide into authoritarianism could easily isolate China and seriously stall its economic engine.

I could not help but think while traveling in China that country building in Iraq and Afghanistan, even if totally successful, could not make any difference in world events or the national interest of the US.  Getting China right has a profound impact on the entire world.

BOP

February 24, 2010

Balance of Payments is a term infrequently talked about these days. We are more likely to hear “government is too big” or “government has no place in health care” or “jobs, jobs, jobs”. Every so often the business section of your newspaper will report for the umpteenth time, “US exports lagged hopelessly behind imports”. In a time of high unemployment and a generally slow economy, it is mind boggling how that can be taking place. What is more mind boggling is why politicians do not jump on this as a route to putting people to work and reducing the size of the US budget deficit?

Unions and some politicians jump to tariffs and call for an end to “free trade” as the cure. In our global interconnected world, moving away from the notion of “free trade” seems foolish. But what else can we do?

I would suggest we read our history books and research the idea of “common wealth”. The role of government has been to invest in those undertakings that increases the common wealth, thereby making the private sector more innovative and more productive.  In essence, the government invests in order to raise all boats.

Over the years, government subsidies seem more to be direct rewards to certain sectors or industries, and not as a spring board for a broader slice of our economy.  Do you think special interests had anything to do with this?  Education, roads, harbors, energy grids, and research are examples of where the government could invest money that would return much broader paybacks.

Here are two important cautions. (1) It is not simply building any road, or dredging any harbor, or sponsoring any education subject, or building any type of energy grid, or any of these, at any cost. Choices need to be made and returns need to be considered. (2) We need congruent national policies. For example, seriously ending our dependence on fossil fuel (oil being first) cuts both a large part of our import cost as well as stimulates alternatives that can create many good new jobs. A sensible health care system, much like Europe, Canada, or Japan could free up a lot of personal discretionary consumer spending which in turn could lead to the creation of many private sector jobs. A compassionate as well as rational immigration and guest worker policy could provide American industry and service companies with good workers and good customers. (Those who want to close America’s doors or even to send back the estimated 11 million undocumented aliens would make matters much worse if they got their wish.)

The current economic slow down reflects deep mistakes and very bad habits of the last 20 years. Global savings (from exporters to the US) along with foreign wealth created by the US’ insatiable appetite for oil have both flooded back into the US looking for investments. Unfortunately those investments have been in collaterialized debt obligations, credit default swaps and other “get rich fast” schemes. The US’ common wealth has decreased and its time to go back to basics.