Right now, China’s economy seems inextricably linked to the economy of the U.S. The argument we repeatedly hear is that China, indeed the world, depends on the U.S. consumer. The U.S. is, we are told, the consumer of last resort. Our consumption powers the world economy. As the U.S. goes, so goes the world. I think this is a questionable assumption.
It is not in China’s or the world’s interest to be forever wed to the U.S. consumer.
On this score, Keth Brasher has an interesting article: U.S. market is losing its appeal for China
The strength of the euro propelled China’s exports to the European Union market past its exports to the United States for the first time in February.
China sent more than 31 per cent of its exports to the United States in 2000, but that dropped below 24 percent in November and hit 22.7 percent in February, according to tabulation by Goldman Sachs that includes Chinese goods transshipped through Hong Kong.
Frank Levin, the U.S. under secretary of commerce for international trade, said, “China has been making more of an effort in recent years to diversify its export markets.” He noted that China’s share of all American imports is still climbing but at a slowing rate.
In short, the rest of the world is taking up the slack as the U.S. economy slows.
“Natural enough,” you say. “Furthermore,” you add, “The U.S. stock market continues to soar, certainly a clear sign that our economic health is fine.” I do not think it is. Nor do I see the stock market as a clear reflection of our economic strength.
Let’s step back for a moment and take a hard look at some factual data:
- Of the Fortune 500, at least 450 are now in China.
- Between 2000 and 2003, foreign firms built over 60,000 manufacturing plants in China. Some of these target the Chinese market; most target the world market. U.S. firms have been at the forefront of this development.
- FDI in China accounts for 60% of its exports; 80% of its exports in IT.
Yes, the stock market is doing well. U.S. corporations that have relocated factories and plants in China and other developing countries are doing very well, indeed. The stock market is more a reflection of their health and activity in China than of the health of the U.S. economy. Remember: Those firms are China’s export engine.
“But,” you say, “the U.S. is still an economic powerhouse.” My counter is simply: Year by year, that economic powerhouse is losing oomph. Consider the following:
- From 1994-2001, U.S. share of world trade was a relatively stable 13%. In 2003, its share declined to 10.7. In 2004, its share was 10.2. Not a good direction. . Furthermore, U.S. share of global trade in industries such as machinery and equipment is falling. The U.S. now runs a trade deficit in advanced technology products, 21st century goods, goods that leaders of the 21st century should be expected to produce.
Now ask the question: What can we expect in the U.S. as our own rate of growth slows, as we experience a soft or hard landing, as China and other developing nations diversify their markets, and as the dollar softens. Below are some strong possibilities:
- An increase in the cost of energy—and those products dependent on oil–, some raw materials, and imported goods.
- A continued downward pressure on U.S. wages. China and the developing world will continue to be “wage-competitive.”
- A continued flow of U.S. companies to China and other developing countries. U.S. corporations in China and elsewhere are not returning, despite a weakened dollar.
- A strong U.S. stock market, reflective more of U.S. companies abroad than our own economic health.
- An increasing temptation for well-heeled foreigners to buy American assets as the dollar weakens vis-à-vis their currencies. Maybe someone will buy I-95.
- A growing possibility that other countries will not continue to finance our debt as the dollar weakens.
- More and more talk of reducing or privatizing our social safety net.
- An increase in the disparity of wealth in the U.S. and elsewhere.
Not a rosy picture. One image comes repeatedly to mind: The U.S.—with its vast wealth and powerful technology—is “seeding” the world and may well expire in the effort.
China’s entry into the WTO, globalization itself, has set in motion forces that are rapidly moving beyond anything we can do.
In future posts, I will look at China’s long-range plans as China itself sees them, together with their implications for the U.S. and the world.