China: Don't Fear a US Backlash
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China: Don't Fear a US Backlash
Andy Xie (Hong Kong)
The media is once again talking about a potential backlash in the US against China trade. However, such discussion appears to be limited to a small group. Chinese exports to the US have little overlap with US industries. Retail prices for Chinese goods are three to four times import prices. China trade arguably creates many times the number of jobs lost in the US as a result of China trade. American workers appear to have as much at stake in China trade as Chinese workers.
China trade helps to cut the US trade deficit by shifting imports from high-cost production locations to low-cost China. As the dollar depreciates, to control inflationary pressure, the US needs to import proportionally more from China.
If China were to implement a significant revaluation of its currency, as some in the US are demanding, I believe inflation in the US would surge, which could help cause the US bond market to collapse. A major Chinese currency revaluation would shift jobs from China to other developing countries, not the US. Thus, a Chinese revaluation would harm, not benefit, the US.
[Someone needs to explain this to SnowWhite Mish]
In my view, the US trade deficit can only be resolved by the US increasing its savings rate and attracting automobile and machinery industries to relocate to the US from Europe and Japan. I do not believe that Chinese action on its currency will solve the US deficit problem, as China’s total exports are less than the US trade deficit.
China has many structural problems. It needs to achieve a soft landing of its economy, reform its financial system, and float its currency eventually. However, in my view, it needs to carry out these tasks in the above order to maintain stability. A stable Chinese economy is now in the United States’ best interests.
A China Trade Backlash Appears Unlikely
The US-China Economic and Security Commission (USCC) issued a report that said the US had lost 1.5 million jobs to China since 1989. Moreover, the departing US Secretary of Commerce has recently talked about a backlash against China trade in the media.
Investors should not take this story too seriously, in my view. The economic case for a backlash against China is not strong. The US has benefited enormously from the China trade. However, some in the US worry about the strategic implications of a rapidly growing China, which is a separate issue. I believe that the noises against the China trade are limited in scope. Restraining China trade for strategic reasons would require the US to adjust its international stance dramatically, and given its current commitments overseas, particularly in the Middle East, it is difficult to imagine that the US would want to jeopardize the Sino-US relationship now.
Significant Upside to the US from China Trade
The risk of a major disruption to US-China trade is minimal, in my view. First, China trade creates employment in the US. US imports from China rose by 28% last year and reached US$195 billion, or 13.3% of total US imports. On average, each dollar the US pays for imports from China retails for US$3–4 in the US. Adding value to Chinese imports may account for 3–5% of US GDP. Four to eight million jobs in the US could be associated with adding value in the China trade.
In contrast, for each dollar that China earns from exporting to the US, Hong Kong, Taiwan, or other foreign countries, some 20 cents goes for profit and depreciation, and a further 30 cents goes for imported components. For all its labor and infrastructure, China gets 50 cents. Thus, for each dollar from the China trade, the United States’ value-added is six to eight times China’s.
Second, the China trade has been enormously profitable to corporate America. The value chain in the China trade is mostly under the control of US companies. Taiwan or Hong Kong companies manage factories, while US companies focus on the high value-added part in R&D, marketing, and distribution. My rough calculation (based on conversations with Taiwan and Hong Kong companies) is that corporate America earns 10% net profit from final sales of Chinese goods in the US. Total profits from the China trade for corporate America could have amounted to US$60–80 billion, or 10–15% of total S&P 500 profits, last year.
And Little Downside
Downside to the US from the China trade is minimal, in my view. The origins of US-China trade occurred when Hong Kong and Taiwan’s light manufacturing businesses relocated to China to lower production costs and offer lower prices to US importers. The industrial restructuring against these imports had already happened in the US. Hence, the initial surge of imports from China 10 years ago brought with it major benefits to the US consumer and little pressure on US labor markets.
As US multinational corporations actively searched for savings by tapping China’s low-cost labor market, imports from China broadened. This certainly had some impact on US labor, especially in the remaining light manufacturing industries. However, the numbers involved were quite small. The USCC report cites only a figure of 1.5 million since 1989, or 1% of the US labor force over a period of 15 years. The US economy creates more jobs in one year, and normal economic restructuring would have shed far more jobs.
I am not trying to minimize the impact on the labor market. Many small company towns have been affected disproportionately, and it is difficult for people to find alternative employment in such small cities. However, this is how trade works. While some are negatively affected, most benefit.
Rmb Revaluation Would Worsen the US Trade Deficit
The idea of the US pressuring China to revalue its currency in order to decrease its own trade deficit is puzzling to me. The best argument I can take from this is that, if China revalues its currency, the euro and the yen could appreciate more, which could be meaningful in terms of decreasing the US trade deficit.
However, US wages are more than 30 times those in China, and thus it is difficult to see how a Chinese revaluation could bring jobs in China back to the US. Instead, a Chinese revaluation would send jobs from China to other emerging economies like Vietnam or India. That would likely worsen the US trade deficit because, instead of importing from China, the US would import from higher-cost producers.
Anti-China Trade Talk Appears Limited
The China trade issue played next to no part in the US elections last year, and for good reason, in my view. Most US voters have not been adversely affected by competition from Chinese imports. This is totally different from the impact of Japan trade on the average American in the 1980s, when Japanese businesses were in direct competition with pillar US industries like autos, steel, and electronics. The Japanese businesses controlled the value chain in the trade all the way to distribution. Thus, few Americans got jobs from the Japan trade, but many lost jobs.
In conclusion, I do not believe many in the US are upset by the impact of China trade, because many Americans get jobs from the booming China trade, and American businesses make a disproportionate amount of profits from it compared to the Chinese. I am thus surprised that this backlash story is being revived now.
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