China spreads wealth
By Elliot Blair Smith, USA TODAY
The U.S. trade deficit with China hovers near a record, but some U.S. companies are finding opportunities in the smoke and din of China's industrial revolution.
After more than a decade of economic growth averaging 10% a year, China's domestic needs — measured as its share of global imports — continue to grow quickly and are nearly as great as its share of global exports, an International Monetary Fund analysis shows.
The USA's monthly trade deficit with China now exceeds $16 billion, more than double its deficit with Canada, according to the U.S. Commerce Department. Yet some U.S. firms, including old-line manufacturers, are finding plenty of opportunity in that country:
• Alcoa, the world's largest aluminum manufacturer, is finalizing plans to reopen idled smelters in New York and Washington state this year. It will add about 1,700 U.S. jobs to take advantage of the surge in global-commodities prices driven by China's economy.
Alcoa also plans to reopen a Canadian smelter later this year, adding about 1,000 jobs, the company says.
• General Motors expects to earn $600 million in the Asia-Pacific region this year, led by China, its largest growth market, the company told automotive analysts last week. At the same time, GM's North American profit of about $500 million this year will be offset by an expected $500 million loss in Europe.
If the automaker's forecast holds, 2005 will be the first year that GM's Asian profits outpace those in its North American operations since the carmaker reorganized its business in 1998, the company says.
• Deloitte Touche Tohmatsu, the Swiss audit and tax consulting firm, is identifying China and India as its "most aggressive investment" objective for firm resources this year, according to CEO William Parrett.
Deloitte, with $16.4 billion in global revenue, recently disclosed that its partners outside the USA contributed half of the organization's revenue last year. That is the first time non-U.S. billings rivaled its revenue in this country.
China's drive to produce — and consume — is credited as a major force in sending global-commodities prices soaring since 2002. Oil prices briefly surpassed $50 a barrel last year. Crude prices have since fallen back, but BMO Financial Group's Oil & Gas Index closed 23% higher in 2004, while metal and mineral prices rose 24%, the Canadian firms' research shows.
BMO's 2005 commodities forecast, released Monday, anticipates that prices will ease.
Nevertheless, the stresses caused by China's rapid expansion prompted that country's policymakers to attempt to slow growth to less than 8% this year. China accounts for about 6% of global trade, up from less than 2% in 1990, according to the IMF.
CIBC World Markets senior economist Benjamin Tal says, "We doubt the Chinese economy will be able to slow down to less than 8%." He says political considerations related to serving the country's large population will trump policymakers' economic targets.
"That will continue to put significant pressure on (global) commodity prices and will trigger a shift in demand from North America to China," Tal says.
Although Americans usually understand such warnings in threatening terms, the examples of Alcoa and GM show that China's growth can be beneficial, too.
During remarks to automotive analysts last week, GM CEO Rick Wagoner expressed his company's "intense drive to grow global revenue" to offset higher health costs in the USA and a European restructuring.
GM forecast a 6% increase in China's car market, to 5.6 million vehicles this year, and continued strong earnings there despite greater price pressures.
Alcoa also aggressively tackled the China market. It has formed four joint ventures to participate in that country's efforts to surmount an annual production deficit of 500,000 metric tons of aluminum, according to company spokesman Kevin Lowery.
On Jan. 1, China slapped a tax on aluminum exports to further help it close the gap. BMO economist Earl Sweet says China's needs exacerbate a global problem. "There is going to be a fundamental supply shortage until 2006 or 2007," he says.
Demand in China may not translate directly to U.S. exports, but Lowery says higher aluminum prices there prompted the company to restart three idled North American smelters and to invest $2.5 billion this year in several new projects from Iceland to Brazil.
"We have a saying here that only fools try to predict what the prices of metal will be," Lowery says. But, he adds, once the company restarts the North American smelters, it will not hurry to close them again.
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