The Challenge of a Changing China

Lower than expected growth numbers from China on Monday have raised worries that China’s economy may be losing momentum.  Forecasted to have a growth rate around 8%, China’s actual growth came in at a lesser 7.7% for the January to March quarter, compared with 7.9% in the previous three months. This slower growth is in part due to lagging recoveries in the US and Europe causing China’s exports to decline. However, it is important to note that major, if understated, structural changes within China’s own economy have also contributed to these unexpectedly low growth numbers.

Rapidly rising wages have led to a systemic shift in the way China’s economy currently operates and have caused the country to move away from its traditional reliance on low cost manufacturing. China is looking towards a transition to a more sustainable economic growth model and these numbers might be indicative of the growing pains that China is currently facing. In fact, according to Ms Yao of Societe Generale,”Given Beijing’s goal of restructuring the economy, a relatively moderate economic growth is not a bad thing in the longer term.” While China will likely remain a manufacturing hub thanks to its relatively mature investment environment, superior infrastructure, and skilled workforce, it is the higher-knowledge industry sector and domestic consumption that will be the future drivers of Chinese growth.

Improving wages and job opportunities have created an optimistic and vibrant consumer class that has demanded both a higher standard of living and higher quality goods and services. Metaphorically speaking, Chinese citizens are emerging from the factories and entering the malls. Rather than being a mere base of production, China has become a prime market to sell into as consumption continues to increase. This massive and complex market holds huge commercial potential for those businesses that can successfully adapt and gain a foothold. Meanwhile, China itself can benefit greatly from increased foreign direct investment as its economy continues to mature.

Despite China’s economic dynamism, it is still a place that is plagued with many dilemmas that limit its potential. Some of the most infamous issues revolve around corruption, which is especially rampant at the local level leading to staggering pollution, serious quality control issues, and enormous levels of inequality. In addition, China’s educational system is stunted by its singular focus on testing and needs to be reworked to foster creativity and innovation, skills that are vital in an increasingly connected global marketplace. These concerns may limit China’s global economic potential, especially when major policy efforts are still needed to address these critical domestic problems.

Overall, China is still dealing with the disorder commonly found during major economic transition. Its switch from a primarily manufacturing economy to a consumer economy may take time as growth rates begin to rebalance. In fact, it is likely that  these declining numbers indicate not economic problems in China, but an economic changing-of-the-guard that will result in less dramatic, healthier, and more reliable economic growth.

Posted by: Matthew Goldberg

Sources: The Economist, BBC News, Bloomberg, CME Group

Photo Credit: China Pavilion courtesy of flickr user Wojtek Gurak

Reinvigorating Trade Negotiations: Optimists in the Midst of Battle

Free trade advocates are known for being optimistic; espousing the removal of trade barriers that are often jealously guarded by domestic constituencies as part of the national interest. The global movement towards free trade as envisioned by the World Trade Organization has always been an uphill battle, but this month it has had its fair share of reasons for hope. Negotiations for trade agreements have been struck between the EU and Japan as well as the EU and the US in the Transatlantic Trade and Investment Partnership TTIP), and Japan announced its bid to join the 11 countries negotiating the Trans-Pacific Partnership (TPP). These will be the most comprehensive trade agreements in history if they are fully realized, and the collective member countries constitute nearly 70% of world GDP. The conclusion of these trade deals, although bilateral, would be a great step forward in defining comprehensive free trade standards for the global market.

The reasoning behind this reinvigoration of free trade deals is expressed clearly in a study commissioned by the German Federal Ministry of Economics and Technology, as explained below:

The transatlantic free trade initiative needs to be considered against the backdrop of (i) eroding competitiveness of industrialized countries relative to emerging nations such as China and India, (ii) the long-lasting standstill in multilateral negotiations at the World Trade Organization (WTO), and (iii) the need for growth-stimulating structural reforms, as vividly highlighted by the current crisis in the EU.

The impetus and goals of these agreements are not only economic in nature, but also geopolitical. The Information Technology and Innovation Foundation (ITIF) describes “a battle being fought now for the soul of the global trading system”, in which these free trade deals can promote high standards for reducing barriers to trade and set the agenda for future multilateral trade talks.

However, as  ITIF notes, there are many obstacles to overcome in this process. Agriculture, automobiles, cultural industries, and textiles are all industries that are historically reluctant to liberalize. Non-tariff barriers such as incompatible regulatory systems are even more problematic, but liberalizing these areas will bring the most benefits. The services market is another complex area, but because 30% of manufacturing costs are business services, there are strong economic incentives to liberalize trade in services. Since a large part of trade volume between these countries is intra-industry and intra-firm trade, companies’ costs for intermediate goods will be substantially reduced. Although most studies focus on the static and immediate gains from these trade deals, the dynamic and ongoing benefits will create positive feedback that renews the economic foundations of industrialized nations.

This is an opportune moment for trade deals, and the window may be closing fast. The political will is currently there to complete these deals, but may not last after the woes of the latest recession have tempered. Europeans and Americans are trying to stimulate their languishing economies, and Japan is pursuing radical new policies to end stagflation. Geopolitical considerations and a renewed emphasis on international competitiveness are the final pieces of the puzzle that make the deals more plausible at this point in time.

There are reasons for optimism in trade policy circles, but the battle is only just beginning.

Posted By: Ben Copper

Sources: IFO Institut, Information Technology and Innovation Foundation, Foreign Affairs

Picture Credit: Cargo Ship Terminal Burchardkai (Hamburg, Germany), courtesy of flickr user      Reinhard_Schuldt

Do traditional measurements misinterpret global trade?

As the world economy becomes more interconnected, it has become clear that import/export trade figures by themselves do not fully capture how much the US contributes to global commerce. Imports and exports merely measure the trade in completed products between nations and present a flawed picture. On the other hand, metrics such as US foreign affiliate sales provide information on longer-term investment and entrenchment in foreign markets, thereby giving a substantially different, and perhaps more accurate, look at what the US provides in goods and services.

Taking a look at exports trade data, a country like Ireland looks inconsequential to US trade with only $7,276 million (USD) in exported goods. However, Ireland is actually an important hub for transnational companies, and rakes in huge amounts of investment as shown by the foreign affiliate sales which puts Ireland at around $171,895 million, a number that eclipses Mexico at $143,478 million. Using only exports, Mexico is our number two trading partner for exports, but when we use the Sales/Export ratio, Mexico stands at 0.9, whereas Ireland is at 23.6.Without accounting for foreign affiliate sales, policy makers would have no idea of the importance of Ireland to US commerce. In addition, using foreign affiliate sales sheds light on other trade relationships, including Germany a country that many policymakers are worried about due to our supposed trade imbalance. In actuality, while US exports with Germany are only at $48,161 million, the US foreign affiliate sales are at $244,785 million and a ratio of 5.1. This means that the US is very much invested into Germany and the trade imbalance is not as nearly as significant when looking at both sets of metrics. This also presents an interesting note on the relative significance of trading partners. Policy-makers often stress the importance of China to US trade, but when looking at foreign affiliate sales, China is only at $138,991 million compared to Germany’s $244,785 million. This has the implication that the US actually has more trade interests in Germany, which is something that is completely unacknowledged when measuring using only export trade.

Using only export numbers presents an incomplete depiction of US trade. It is very difficult to make smart policy that improves US trade potential if the true trade relationships between the US and foreign countries are not understood. In terms of trade importance to the United States, opportunities lie with the newly proposed Trans-Atlantic Trade Agreement at almost $1,473,483 million in foreign affiliate sales. The United States must begin to rely more on foreign affiliate trade data or at least use it to supplement traditional import/export measurements to get a more accurate representation of US trade interactions.

Posted by: Matthew Goldberg

Sources: U.S. International Trade Commission, Vox, OECD, U.S. Census Bureau

Graduation Rates: the Good, the Bad, and the Ugly

One of the main goals President Barack Obama laid out during his first term was to return America to its previously held position as the country with the highest number of college graduates per capita by 2020. This American Graduation Initiative (AGI) requires increasing the percentage of college graduates in the US workforce by 50% by the end of the decade. In order for the AGI to be accomplished, the number of college graduates would have to increase by an annual 16% every year from 2010-2020. However, the problem in reaching this goal may be rooted in low graduation rates, rather than low enrollment numbers.

America2020 is a private sector approach to the same problem, focusing specifically on STEM (Science, Technology, Engineering, and Math) graduates. Their plan is to encourage STEM degree completion by committing industry professionals to volunteer their time mentoring and teaching students in these fields. There will be an estimated 10 million STEM job openings by the year 2020, and OECD data reports that US students tend to have a low interest in science. This approach has already seen significant improvements in graduation rates with the schools involved and those students who have participated in the program are far better prepared for college.  Citizen Schools, one of the major forces behind the America2020 initiative, along with representatives from the White House and several big-name companies recently convened here at the Wilson Center to discuss details of its implementation and how they could be involved.

The American Dream 2.0 is an initiative by the Bill & Melinda Gates Foundation that, “offers a comprehensive framework for how the hundreds of billions invested in the financial aid system can increase college access, affordability, and completion”. According to the Foundation’s findings, 46% of students enrolled in higher education institutions fail to graduate within six years. This rate increases to 63% for African Americans and 57% for Hispanics. In addition, total annual borrowing for college has more than doubled in the past ten years, as tuition rises faster than family income or inflation. These statistics are worrying, because those who borrow money for school but end up dropping-out without earning a degree have higher unemployment rates than those who graduate.

Good news comes from high school completion rates, which reached a record high in 2010 at 78.6%. While this is certainly heartening, fewer than half of those in the class of 2012 were ‘college ready’ as determined by the College Board last fall. In order to meet the challenges of President Obama’s AGI, education policymakers need to focus not only on college enrollment rates, but also on access, affordability, completion rates, and high school rigor. Although in the current fiscal climate, large scale investments in education may be harder and harder to implement, the effects of education investment on the productivity and success of our nation’s young people are immeasurably important.

By: Ben Copper

Sources: Huffington Post, PR Newswire, White House records, EducationSector.org, Citizenschools.org

Photo Credit: flickr user: Smithsonian Institution

American Manufacturing Starting to Make Sense Again

In the past decade, offshoring was considered an obvious business decision for companies that wanted to reduce costs and increase profits. However, this trend may soon begin to wane as many American companies, both large and small, return to the U.S.

This so called “Reshoring Movement” has been generating a large amount of buzz, especially as high profile companies such as General Electric and Apple plan to start manufacturing more products back home. This reverse course is based both in public relations and sound economic reasoning. While larger companies often leave the majority of their manufacturing abroad, they are still able to benefit from the positive publicity of selling some American-made goods. For smaller businesses, it makes clear economic sense primarily due to soaring wages in low-cost countries. For instance, the pay and benefits for the average Chinese factory worker increased by 10% a year between 2000 and 2005 and rose to 19% a year between 2005 and 2010. This increase has made offshoring only marginally cheaper, and firms still have to deal with other problems such as intellectual property theft and unwieldy supply chains.

This trend ties in nicely with the issue over consistently high US import levels and enormous trade deficits. Harry Moser, head of the Chicago-based Reshoring Initiative, states that “since the 1950s, about three million manufacturing jobs have been lost to imported goods. So to balance the deficit we’ll need to bring back three million jobs.” While “reshoring” has only brought back around 50,000 jobs in terms of offsetting trade imbalances, it is an interesting development that is worth further exploration.

Posted by: Matthew Goldberg

Sources: The Economist, MIT Technology Review, Forbes

Photo Credit: World Class Manufacturing Academy courtesy of flickr user Chrysler-Group

US College Degree Attainment Remains Stagnant as Other Countries Pull Ahead

According to a December 2012 report by the Center for Public Education, the percentage of young adults in the US who are  college graduates has not significantly changed from the percentage of college graduates aged 55-64. This contrasts with the great gains that have been made in other parts of the world (such as South Korea, Japan, and most of the EU) where the percentage of college graduates is significantly rising each year. For those aged 25-34, the United States  now ranks 14^th in the world for the percentage of workers with a college degree. While the United States remains 2^nd in the world for 4 year degree attainment, just behind Norway, the main lag is in 2-year degree attainment, where the United States comes in 18^th place.

The report shows that students fare better in college if they are well prepared in high school. This is especially true for low-income and low-performing students. According to the Council on Competitiveness, “simply being an American is not an entitlement to a secure, high-wage job” due to competition from emerging markets.  To win the skills race, workers need to attain a higher level of education, and success starts in K-12 programs.

The recent PAGE publication by education reformer, Paul Vallas: “Making a Success of Every School”, points out that it is not underinvestment that is hurting our public schools (out of OECD countries, the United States spends the 2^nd most on public education), it is “the inability to invest wisely in the systemic reforms that would remove obstacles impeding the modernization of our educational system to meet new realities.”  Some strategies to improve American K-12 education include: providing greater access to educational technology in classrooms, encouraging partnerships between high schools and local vocational or community colleges, and ensuring the financial predictability that is crucial to long-term planning. The US system must evolve to meet the challenges of the 21^st century if its workers are to remain competitive in global markets.

Posted by: Ben Copper

Sources: Center for Public Education, Council on Competitiveness

Photo Credit: Teacher in Classroom courtesy of Flickr user www.audio-luci-store.it

Google’s Worldwide Anti-trust Woes- Coming to an End?

For the past two years the Federal Trade Commission has investigated the possibly anti-competitive actions of mega-company Google. Now, the investigation may be coming to a close as the FTC issued its final ultimatum: Google must produce a detailed proposal listing voluntary concessions the company will make to resolve issues over its search engine practices.

Several competitors, the most infamous of which is Microsoft but also including Yelp and TripAdvisor, have alleged that Google searches prioritize searches not necessarily by relevance but to promote their own products. Furthermore, competitors are concerned over potential copyright infringements of Google’s “snippets” which show with preliminary results. Microsoft has launched the “Scroogled” campaign to educate online users on the anti-trust battle and to ultimately persuade the audience to use Bing’s search engine honesty.

From Google’s point of view, spokeswoman Jill Hazelbaker “the focus of Google is on Google and the positive impact our industry has on society, not competition”. They state that the order of search results is showcasing the best product available, which may put their own products over Bing or other rivals. They also state that regardless of the numberless ranking on the page, every site is equally one click away. Political proponents of Google, including several Democratic Senators have been outspoken on the issues, reminding the FTC that their job is not to protect competition but rather to aid consumers.

As Senator Ron Wyden of Oregon stated, it would be “troubling if the FTC sought to expand the use of its authority to target a company for simply being popular rather than engaging in unfair or deceptive practices that harm consumers.”

A similar anti-trust case is ongoing in Europe, which has offered Google comparable terms to end the need for a law suit. If Google’s proposal does not fit federal and EU expectations, the company could be charged up to 10% of the company’s value, or about $4 billion. Only time will tell the outcome of this case for Google, its competitors, and consumers worldwide.

Posted by: Sophia Higgins

Sources: Reuters, Time Business

Photo credit: Google @ photostream courtesy of Flickr user halilgokdal

United States Rejects UN Telecom Treaty in Dubai

The United States on Thursday said that it would not sign the new ITU treaty aimed at Internet governance. The U.S. delegation at the conference in Dubai, led by Ambassador Terry Kramer, commented that there were “too many issues here that were problematic for us.”

The treaty is intended to govern how telephone calls and communications traffic is exchanged internationally. Though the treaty is not legally binding, the provisions surrounding Internet governance and content matters were opposed by the United States and several other governments such as the UK, Canada, and Sweden. The U.S. delegation further noted that the treaty should not be applied to Internet providers as well as private and government networks, but rather to traditional telecom operators. Though toothless, the treaty could set a future precedence on Internet governance that would be against U.S. interests, according to Mr. Kramer.

Technology trade groups, spearheaded by Google, warned early on about the danger of adopting the ITU treaty and its potential for leading to future censorship of the Internet. Other criticism of the treaty included the risk of creating an obstacle for innovation and increasing government regulations of the Internet.

Political leaders from both parties passed resolutions in the House and the Senate directing the U.S. government to oppose international efforts to increase ITU’s control over the Internet.  Other Western countries joined the U.S. in questioning why governments should meddle with the free flow of information on the Internet. Some of the most vocal nations in favor of the new treaty were China, Russia, Iran and the Gulf Arab states. In total, 89 countries signed the treaty; 55 did not. The conference showed the deep ideological rift among the 193 member nations of the UN.

The treaty will take effect in January 2015. It remains to be seen where the non-signatory countries will end up, many of which may yet sign the treaty. What is certain at this point, however, is that the future of the Internet, and how to govern it, will remain a hot debate topic in the coming months and years.

Posted by: Samuel Benka

 Sources: The Los Angeles Times, The Seattle Post Intelligencer, The Hill

Photo Credit:  ITU WCIT 2012 Courtesy of Flickr user veni markovski

Wilson Center Policy Brief Series: Manufacturing Matters, Strengthening America: Inventing the Future

The Wilson Center recently released two essays by Kent Hughes, Director of the Program on America and the Global Economy, in its series of policy briefs on critical issues which will run from now until Inauguration Day.

 

Manufacturing Matters

Manufacturing plays a key role in the U.S. economy and will continue to do so. The private sector provides roughly 70 percent of total U.S. spending on research and development, and the bulk of that amount comes from manufacturing enterprises. Manufacturing generates 90 percent of U.S. patents. It also is central to the system that translates laboratory research into commercial products, thus generating jobs and creating wealth. Manufacturing also constitutes the single most important export sector of the economy and is thus critical to America’s ability to pay its way in the international economy. Finally, manufacturing generates millions of jobs, which provide pay and benefits that exceed the national average. Looking ahead, the United States needs a manufacturing strategy that can support the emergence of advanced manufacturing processes that, in conjunction with low-cost energy, can revitalize the U.S. manufacturing sector.

>> Read the Policy Brief in its Entirety

Strengthening America: Inventing the Future

The U.S. innovation system has enormous strengths, including public and private support for research and development, the world’s best university system, and an entrepreneurial risk-taking culture. But those elements of the system now face several domestic and international challenges. In the United States, cuts in federal spending could reduce support for university research. The kindergarten through 12th grade (K–12) education system struggles to keep pace with the rising demands of the 21st-century workplace. Internationally, the United States now faces competition to attract or keep advanced manufacturing firms, research facilities, and top scientific talent. The United States will need to maintain support for research and development (R&D), improve its education system, and learn from best practices around the world.

>> Read the Policy Brief in its Entirety

Making a Success of Every School

The Wilson Center and the Program on America and the Global Economy are proud to share a recently released publication on U.S. education reform:

Paul Vallas, distinguished scholar and noted education reformer, identifies the main challenges facing U.S. education in the 21^st century.  He notes that US performance on the Programme for International Student Assessment (PISA) ranks American 15 year olds as 17^th in science and 25^th in mathematics.  Vallas and others stress that American schools have not declined.  Rather it is a case of technology, a changing job market, and rising international competition demanding much more of America’s educational system.  Attracting and retaining top teachers is vitally important, but Vallas stresses that one cannot neglect early childhood education, school improvement-focused state and district governance, and a 21^st century curriculum.

Click here to access the full report