Home truths about trade with China
'We want to work with China to make sure everybody is working by the same rules of the road when it comes to the world economic system. That includes ensuring that there is a balanced trading flow not only between the United States and China but around the world.'
US President Barack Obama
SCMP, February 15
Ihave always thought that Barack Obama has a matchless talent for looking thoughtfully into the middle distance, and little else.
Vice-President Xi Jinping had proof of it on a visit to Washington this week. All he got was the usual line of talk excusing the US itself of any fault for its economic woes and instead blaming 'cheating' by China. Obama toned it down for the official visit but official Washington plainly remains reluctant to face facts. Here are some of them:
China does not gain a big export advantage from Beijing's control of the yuan's exchange rate. Much of China's manufacturing industry consists of assembling components made elsewhere. The best example of this is Apple's iPods and iPads, which are treated as Chinese exports although only 5 per cent of their retail value is attributable to China.
Virtually all of this trade is denominated in US dollars, which means that any advantage China could have in export pricing is lost as a disadvantage on import pricing of the necessary components. The only real yuan-denominated input is assembly labour and this is a small proportion of total cost.
The exchange rate record demonstrates the hollowness of the cheating claim. The yuan has gained 24 per cent against the US dollar since it was allowed to strengthen in 2005, enough to dent any export advantage, and yet American complaints remain unchanged as if nothing had happened, which is, in effect, true. The yuan's exchange rate makes little difference.
America does its own export cheating. Its technology exports are heavily dependent on military spending and its food exports are hugely subsidised. American diplomats also routinely threaten sanctions against anyone who dares to question the patent, copyright and parallel import rules that they insist on imposing on the entire world to protect their home industries from competition.
American export efforts have not been undermined by competition from China. I refer you to the chart. America's export growth rate over the last six years has been less than China's but not enormously so and hardly so at all recently. The greatest determinant of export growth for both is clearly the general state of the world economy.
Most of China's exports to America are American goods anyway. More than half of total exports are produced by foreign- invested manufacturing plants. The designs, processes, patents, pricing, and marketing are all controlled abroad. It is not the Chinese producer who benefits most, but the foreign owner who, it so happens, is also the customer. He walks away with both the goods and the profits.
American consumers have benefitted enormously from Chinese production efficiency. While overall consumer prices in the US have risen by 42 per cent over the last 15 years, prices of durable goods have fallen by 14 per cent. Average toy prices have come down 57 per cent. But have the people who made this possible ever received a word of thanks from the beneficiaries? Cup your hands to your ears. Listen hard.
Profligate American consumers who scorn savings rely on China to make the necessary investments in their country. All the money that goes to China to pay for consumer rubbish flows right back in again as investment to make up for fiscal and trade deficits. This helps keeps interest rates down and the US dollar strong.
But don't count on Barack Obama to recognise that he already has his balanced trading flows this way. He is still too busy looking at the horizon for inspiration.