Wednesday, December 03, 2003
China an economic threat?
Knowledge@Wharton has an excellent article that pours water on the notion that China is somehow an economic threat to the United States, which is very fashionable in the media these days. Thankfully, the article also sheds light on who will ultimately be hit hard if this trade war goes from rhetoric to action -- consumers.
According to Linda Lim, professor of corporate strategy and international business at the University of Michigan, “the risk is that the Bush administration is getting on the warpath withChina. Who will be the losers?U.S.consumers. Cheap imports fromChinahold down inflation and interest rates [in theUnited States.] Low interest rates keep the economy humming. It’s not clear you want consumers to suffer higher prices and higher interest rates.”
The article also reiterates some basics which seem to have been forgotten in the brouhaha of painting China as public enemy no:1. It's good to return (especially for various shades of policy makers) to these basics often so as to not get carried away with the rhetoric.
“The essence of trade is to allow countries to specialize,” states Erica L. Groshen, an economist at the Federal Reserve Bank of New York. “Just as trade between people allows people to specialize, trade between countries allows countries to specialize in the production of things in which they have comparative advantage. That’s where the gains in trade come from. We can’t all become heart surgeons. It’s better for a few people to do heart surgery rather than each of us to do heart surgery. It’s the same with making products.” Groshen says the products and services in which the United States specializes change over time, depending on what she calls the “three Ts” – technology, taste and trade.
“We specialize in innovation,” Groshen explains. “We start new industries. We [create] new products. We have well-trained workers relative to the rest of the world. When an industry moves from being a new, innovative one to one that’s more mature, we lose our comparative advantage because we don’t need such innovative, skilled workers to make that product anymore. That’s when the rest of the world, which tends to have less-skilled, less-innovative workers, increases its comparative advantage and those jobs gradually move overseas. The more trade we have, the faster that happens. The more transaction costs go down and information costs go down, the more rapidly that can happen. That, in a funny way, is a sign of our success – that we’re continually exporting jobs. This has gone on through thick and thin, in good times and bad, for a century or more.”
The United States has a global current account deficit – that is, an aggregate deficit with all countries in the world combined. It just happens that the biggest deficit of the various bilateral deficits is with China. America has a global current account for two reasons: the U.S. government’s large budget deficit and a paltry savings rate on the part of U.S. households. To finance its growth, America relies on large capital inflows from the rest of the world. Since the United States has a global current account deficit, it is importing more than it is exporting and, as a result, is earning less foreign exchange. The difference has to be made up by borrowing from abroad or selling assets to foreigners. The most recent statistics, for October, show that foreign investment into the United States has fallen dramatically. Because investors throughout the world have a low appetite for U.S. assets, it will be harder for the United States to borrow from abroad.
Is the impact of China on the U.S. economy mildly exaggerated? Lim provides some perspective.
“It is not China’s fault that the U.S. has a global current account deficit,” Lim states. “The current account deficit in the U.S. is now 5% of U.S. GDP. This is an historic high. If this were the case in Brazil, capital markets would be panicked. The deficit with China happens to be the largest of all the bilateral deficits that the U.S. has. But, even so, imports from China account for just 1.5% percent of the total U.S. GDP. It’s very small.”
“The U.S. economy is so huge that whenever you have something like high unemployment it has to be because of domestic factors, not trade,” she says. “Total imports from all countries in the world are only 15% of U.S. GDP. So, on a political level, there’s an attempt by the Bush administration to blame someone else for what is a failure of the U.S. domestic economy. This is not necessarily the administration’s fault; it could be the business cycle. The weak point in the Bush record is the large loss of employment, so it’s temping to blame foreigners rather than yourself. And it’s easy to point to China because of the trade deficit.”
According to Linda Lim, professor of corporate strategy and international business at the University of Michigan, “the risk is that the Bush administration is getting on the warpath withChina. Who will be the losers?U.S.consumers. Cheap imports fromChinahold down inflation and interest rates [in theUnited States.] Low interest rates keep the economy humming. It’s not clear you want consumers to suffer higher prices and higher interest rates.”
The article also reiterates some basics which seem to have been forgotten in the brouhaha of painting China as public enemy no:1. It's good to return (especially for various shades of policy makers) to these basics often so as to not get carried away with the rhetoric.
“The essence of trade is to allow countries to specialize,” states Erica L. Groshen, an economist at the Federal Reserve Bank of New York. “Just as trade between people allows people to specialize, trade between countries allows countries to specialize in the production of things in which they have comparative advantage. That’s where the gains in trade come from. We can’t all become heart surgeons. It’s better for a few people to do heart surgery rather than each of us to do heart surgery. It’s the same with making products.” Groshen says the products and services in which the United States specializes change over time, depending on what she calls the “three Ts” – technology, taste and trade.
“We specialize in innovation,” Groshen explains. “We start new industries. We [create] new products. We have well-trained workers relative to the rest of the world. When an industry moves from being a new, innovative one to one that’s more mature, we lose our comparative advantage because we don’t need such innovative, skilled workers to make that product anymore. That’s when the rest of the world, which tends to have less-skilled, less-innovative workers, increases its comparative advantage and those jobs gradually move overseas. The more trade we have, the faster that happens. The more transaction costs go down and information costs go down, the more rapidly that can happen. That, in a funny way, is a sign of our success – that we’re continually exporting jobs. This has gone on through thick and thin, in good times and bad, for a century or more.”
The United States has a global current account deficit – that is, an aggregate deficit with all countries in the world combined. It just happens that the biggest deficit of the various bilateral deficits is with China. America has a global current account for two reasons: the U.S. government’s large budget deficit and a paltry savings rate on the part of U.S. households. To finance its growth, America relies on large capital inflows from the rest of the world. Since the United States has a global current account deficit, it is importing more than it is exporting and, as a result, is earning less foreign exchange. The difference has to be made up by borrowing from abroad or selling assets to foreigners. The most recent statistics, for October, show that foreign investment into the United States has fallen dramatically. Because investors throughout the world have a low appetite for U.S. assets, it will be harder for the United States to borrow from abroad.
Is the impact of China on the U.S. economy mildly exaggerated? Lim provides some perspective.
“It is not China’s fault that the U.S. has a global current account deficit,” Lim states. “The current account deficit in the U.S. is now 5% of U.S. GDP. This is an historic high. If this were the case in Brazil, capital markets would be panicked. The deficit with China happens to be the largest of all the bilateral deficits that the U.S. has. But, even so, imports from China account for just 1.5% percent of the total U.S. GDP. It’s very small.”
“The U.S. economy is so huge that whenever you have something like high unemployment it has to be because of domestic factors, not trade,” she says. “Total imports from all countries in the world are only 15% of U.S. GDP. So, on a political level, there’s an attempt by the Bush administration to blame someone else for what is a failure of the U.S. domestic economy. This is not necessarily the administration’s fault; it could be the business cycle. The weak point in the Bush record is the large loss of employment, so it’s temping to blame foreigners rather than yourself. And it’s easy to point to China because of the trade deficit.”
