China - the best friend of America's poor

PUBLISHED : Thursday, 19 June, 2008, 12:00am
UPDATED : Thursday, 19 June, 2008, 12:00am

Due to some quirks in American politics, China-bashing heats up in election times. This is the case whether it is congressional or presidential elections. Criticising China does not necessarily gain votes, but a candidate who is fair-minded will appear soft on China and open himself to attacks. Calling Chinese 'goons and thugs', as CNN commentator Jack Cafferty did, was nothing out of the ordinary in today's America.

Yet, in the run-up to the US presidential election, it may be necessary to point out some home truths about China. Sino-US relations are complex and multidimensional but, when it comes to trade, the economic benefits have been overwhelmingly positive for the American middle class and the poor.

A new study by two University of Chicago economists argues that inequality in the US is really not as bad as everyone thinks - largely thanks to cheap goods made in China and sold in chains like Wal-Mart. If Christian Broda and John Romalis are right, the China trade might even have helped ease social tensions and class warfare in the US, given the disproportionate wealth that has gone to the top 3.4 per cent of the highest income earners, while the vast majority of US workers have been bypassed during the eight years of the Bush presidency.

Unfortunately, people - in the US, as everywhere - read newspapers, not economic journals. Instead of studying trade data, goods and services and economic trends, most Americans read news reports that carry scary headlines about poisonous toothpastes, tainted foodstuffs and dangerous toys produced on the mainland. There are also regular reports of exploitation of workers and 'the China price', which supposedly undercuts labour costs in the US.

The main purpose of the new US study, 'Inequality and Prices: Does China Benefit the Poor in America?', is to dispute a consensus, accepted by many academics and media pundits alike, that inequality has increased significantly in developed countries and especially in the US. The two economists make this claim by coming up with a highly controversial definition of equality, which has sparked off a lively debate among their peers.

What is relevant here is the conventional economic observation they make about the rich and the poor being purchasers of very different baskets of goods and services by virtue of their income differences. The wealthy buy more services, where prices are high to begin with and have shot up because of recent inflation. And the goods and services catering to them do not usually carry 'Made in China' labels.

The not-so-well-off and the poor buy mostly goods and services that are cheap. These products, however, are often made in China. Chinese producers have been able to make them cheaply while the likes of Wal-Mart help keep their prices down when they hit American shores. By the two professors' estimates, half of US consumers' savings are attributable to cheap mainland goods.

Inflation works unevenly across different economic sectors. It is often argued that inflation hurts the poor most. This is probably the case in Hong Kong and on the mainland. But if the two professors are right, it is not so in the US. They calculate that inflation of the richest 10 per cent of US households has been 6 percentage points higher than that of the bottom 10 per cent between 1994 and 2005. They argue that these trends continue despite recent surges in food prices.

Their research shows that cheap Chinese goods help maintain a certain living standard for the poor and the lower-middle class in the US. This moderates the effects of the growing inequality of incomes between the tiny group at the top and all the rest. This doesn't mean there really isn't extreme inequality - as professors Broda and Romalis claim - but that it's still possible to live reasonably well if you are not well off in the US.

Average Americans should know, when they vote for the next president, that economically, China is their best friend.

Alex Lo is a senior writer at the Post