Geithner ought to be thankful that China's his biggest supporter

PUBLISHED : Tuesday, 06 April, 2010, 12:00am
UPDATED : Tuesday, 06 April, 2010, 12:00am

US Treasury Secretary Timothy Geithner's announcement that a report to Congress on China's currency policy will be delayed suggests that Washington and Beijing are taking more time to resolve the tough issue, according to analysts.

SCMP, April 5

I have a question to ask but, before doing so, I have to set it up.

About 120 years ago the United States went through an industrial emergence and you can still recall the names that quickly came to prominence - Standard Oil, Ford, General Motors etc.

Starting in the 1950s Japan went through an industrial emergence and the whole world is familiar with the many corporations that quickly became household names at the time - Honda, Sony, Panasonic etc.

The same thing happened in Korea in the 1970s and the result was a similar rapid worldwide acquaintance with Hyundai, Samsung and LG.

So here is my question. Can you give me a mainland brand name known around the world? Go ahead. Try.

Haier? Geely? Lenovo? No way. They are perhaps known names in the financial district of New York but not in Dogdung, Nebraska, or Chienmerde, France, where everyone is familiar with what a Toyota is and from what country it hails.

This should strike you as odd. China's industrial emergence can now be dated to more than 20 years and, while everyone around the world buys its manufactured products, few of these goods are identified with China other than by a small 'Made in China' label.

In another way it is not odd, however. The world has changed so much in recent years that few industries other than resource extraction are any longer associated with a country. This is the result of rapid digital communications, low shipping costs, and vastly greater international capital flows and technology transfers. Countries do what they are best at doing in any process and what others can do better goes to others.

China's big strength is a huge and capable labour force. Where this is needed in labour-intensive piece manufacture and assembly, China dominates. But others still do better in areas such as product concept, finance, design, marketing, shipping and many other activities that all form part of getting a gadget from someone's brainstorm into your hands as a consumer product.

China has only a small share of this whole process and it is not the most profitable share although it is probably the most troublesome.

Elsewhere and at other times this never happened. In the US industrial emergence, American corporations quickly took control of almost all related activities. But this was before the days of the internet, rock-bottom shipping rates and big international banks. China is a victim of modern times in the narrowness of its industrial profile.

Two things have made this worse. The first is that only recently has wage pressure started to force mainland manufacturers of consumer goods upmarket. There are still far too many makers of key chains and fridge magnets just across the border.

The second is that China still has a closed capital account and lacks a real market-based financial system. Making money from manufacturing is difficult enough but it is near impossible when you cannot even price money properly. In manufacturing, China's financial system has to be the US dollar capital market. The yuan is simply not there yet.

Now let us bring this back to Geithner. Much as he and his government complain about unfair Chinese trade practices, they benefit more than they suffer.

Foreign invested corporations account for more than half of China's exports and more than two thirds of its trade surplus. For foreign invested you can effectively read Wal-Mart and other big retailers that can dictate prices by virtue of the size of their orders. China's big trade surplus may be China-registered but it is largely American-owned.

American consumers benefit, too. Over the last six years the overall prices of goods they import have risen by 26 per cent but the overall prices of goods imported from China have remained flat. Low wages in China have allowed American shoppers to splurge more in their big box stores. Who has reason for complaint here?

And the US government has also gained enormously. All of China's US$225 billion a year trade surplus with the US goes right back to the US as investment flow. Geithner wants to keep US interest rates low in order to support an economic recovery. China has been his single biggest supporter in helping him do it.

Thus, rather than delay an announcement, he might do well to make no announcement at all. The world has changed. Nineteenth century concepts of national trade imbalances no longer apply in a commercial world that shuns borders. The US is no loser at all in its trade with China.