The Challenge of a Changing China

chinaLower 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

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Value-Added Trade: New Tracking Tool Reevaluates U.S. Trade Deficits

value_added_tradeA new database developed by the Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) goes beyond traditional trade measurements by analyzing the value added by different countries during production to get a more accurate estimate of global trade balances.

According to the OECD, “traditional measures of trade, that record gross flows of goods and services each and every time they cross borders, may not accurately reflect modern trade patterns and could, if taken alone, lead to ill-informed policy decisions.” The conventional gross-value approach to measuring trade does not take into account the value of intermediate goods into the finished products. For example, while an iPad is “Made in China,” according to a study by the Personal Computing Industry Centre, the U.S. adds $275 to the total production cost, while China only adds $10. Using these figures, the Economist estimates that while iPads accounted for around $4 billion of America’s reported trade deficit with China in 2011, the deficit was only $150 million if China’s exports were measured on a value-added basis. These kinds of misleading estimates apply to more than just iPads. The database statistics show that the trade deficit with China has been drastically overstated in traditional measurements and is actually 25% lower when evaluated in value-added terms.

With modern supply chains becoming increasingly interdependent, the value-added approach better represents today’s interconnected world.  Hopefully U.S. policy-makers will take this new database seriously and use it to more accurately assess the magnitude of U.S. trade deficits, while also recognizing the benefits that the U.S. receives from international trade.

Posted by: Matthew Goldberg

Sources: The Economist, OECD, Bloomberg

Photo Credit: made in china courtesy of flickr user twicepix

The Global Economy’s Missing Piece

With China’s growth stalling and Europe fighting to stay afloat, the world economy is in desperate need of a superhero that will help it stabilize and prosper. In tough times of the past, markets could always rely on the monetary toolbox and the fiscal leadership of United States to prevent global catastrophe. However, in a recent article in Foreign Policy Journal, the German Marshall Fund’s Kati Suominen explains why this time the U.S. will not be there, and what implications that has for future global governance and economics.

Suominen discusses how following World War II, the United States was the global economy’s “quarterback,” leading the offensive with the Bretton Woods summit and the creation of the groups of five, seven and eight who would later establish the World Trade Organization (WTO). During that time, the U.S. dollar became the standard for much of the world’s reserve currency, and the effects of the Federal Reserve Bank’s decisions spanned far beyond Constitution Avenue. She deduces that globalization didn’t just appear out of thin air, but was rather a “U.S.-led order that generated prosperity unimaginable only a few decades ago.” And it was from this “American-led order” that the Asian Tigers boomed and G-5 became the G-20, with “emerging nations such as China and India demanding greater power at the table.”

Suominen notes that while this “U.S.-made” system brought prosperity it also brought more challenges and America saw its credibility around the world chip away facing great fiscal uncertainty and a massive trade deficit. While she does not blame this all on President Obama, she does criticize his administration for deflecting the responsibility of Europe’s debt crisis to Germany and leaving any promise of economic recovery in the BRIC’s hands. From her criticism, she makes four critical recommendations: impose fiscal discipline and promote long-term policy, better integrate the world marketplace with a freer exchange of ideas and resources, equip the IMF with the tools to solve financial risk, and incentivize the international community to enforce many of regulations and protections already in place. Suominen concludes that the “new world order arouse because of American strength, vision and leadership…today, American leadership is again essential.”

Posted By: Jonathan Sherman

Sources: NPR

Photo Credit: G-20 Summit in Pittsburgh courtesy of Flickr user International Monetary Fund

Offshoring to the United States

Offshoring and re-shoring have been staples of the U.S. manufacturing vocabulary for the past decade, but there hasn’t been a lot of discussion about other countries offshoring to the United States. Chinese conglomerates have begun to shift their production and manufacturing to the United States. The incentive is this: in China, companies that export products to the United States at ridiculously low prices are subject to anti-dumping tariffs because the U.S. believes that the products are being sold at a price lower than what it cost to make them, which creates an unfair advantage in the marketplace. If a Chinese company manufactures their product here in the United States, it is a domestic product and is not subject to the same regulations. Raymond Cheng, CEO of one Hong-Kong consulting firms, noted that “it’s a tactical advantage to be next door to your biggest client,” which is just what the Chinese companies are looking for. In addition to avoiding tariffs, opening a plant in the United States saves money on transportation and fuel. Cheng continued to point out that “it’s a natural evolution that as Chinese companies grow into global brands, they will come to the U.S., the largest consumer in the world.”

Chinese manufacturers have been launching U.S. facilities for the past five years, which has been a relief for some states that are desperate for revenue and jobs. The China-based Golden Dragon Precise Copper Tube Group Inc., the world’s largest producer of copper tubing (used in air conditioning, refrigeration, and automobiles), has begun work on a $100 million plant in Alabama. The facility is expected to create 300 jobs upon opening in 2014. The facility’s location is strategic, since Golden Dragon’s largest customer is Houston-based Goodman Manufacturing.

Daniel Rosen, a China expert and partner at Rhodium Group, cites past examples of overseas companies setting up shop in the United States. Specifically, Japanese companies in the 1980s – for some of the same reasons. “Today, there are more than 700,000 Americans working for Japanese affiliates in the United States.” Offshoring to the United States might be an unexpected move, but Chinese companies will be creating local jobs and saving themselves money.

Posted by: Devon Thorsell

Source: CNN Money

Photo credit Factory in Inner Mongolia courtesy of flickr user Bert van Dijk

Dissecting the iPhone Supply Chain

Clyde Prestowitz raised an interesting point earlier in March in his Foreign Policy column when he looked into where Apple products are actually made. A study done by the Asian Development Bank Institute (ADBI) revealed that China should not really be considered the biggest manufacturer of iPhones.

Prestowitz notes that scholars have argued that of the $500 retail price of an iPhone, about $180 comes from the “manufacturing and assembly processes done in China.” This accounts for a $1.9 billion annual contribution to the U.S. trade deficit. The rest of the price tag “results from the design, software development, marketing, shipping, and selling done in the United States.”

Prestowitz explains, however, that “U.S. customs attributes the entire manufacturing value of the iPhone to China” and does not account for the fact that the parts were actually manufactured in other countries. The ADBI study revealed that China imports the parts used in iPhones from places like Taiwan, South Korea, and Japan. China merely assembles these parts, and thus only adds a value of around $6 to the final iPhone retail price. Thus, the U.S. has a trade deficit with a number of Asian countries, not just China.

The details of the supply chain also pointed to declining competitiveness in U.S. manufacturing. The parts imported by China are capital and technology-intensive, which explains why they are being produced in places like Japan, South Korea, and Taiwan. This then highlights the fact that the U.S. is not producing what it, according to Prestowitz, is supposed to have a comparative advantage in.

 

Check out this video and summary of an earlier discussion with Clyde at the Wilson Center on his book, The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How We Must Compete in the Post-Dollar Era

 

Posted by: Pokyee Yu

Sources: Foreign Policy, The Asian Development Bank Institute, The Wall Street Journal

Photo Credit: iPhone 4 courtesy of flickr user superstrikertwo

Event Report: Game Change in the Asia-Pacific: The South China Sea and TPP

Game Change in the Asia-Pacific: The South China Sea and TPP

March 27, 2012

Organized by the Asia Program and cosponsored by the Kissinger Institute on China and the United States and the Program on America and the Global Economy

Speaker: Takashi Terada, Wilson Center Japan Scholar; Professor of International Political Economy, Waseda University

 

China has recently been a major force in political games in the Asia-Pacific. According to Wilson Center Japan Scholar Takashi Terada, speaking at a March 27 Asia Program event, cosponsored by the Kissinger Institute on China and the United States and the Program on America and the Global Economy, Beijing has succeeded in partly disengaging the United States from the trade framework in Southeast Asia by promoting “low quality” Free Trade Agreements (FTA) in the region. China has also viewed the ASEAN Regional Forum (ARF) and East Asia Summit (EAS) as convenient non-binding and consensus-based arenas that allow Beijing to avoid dealing with hard issues such as maritime disputes in the South China Sea.

The Obama administration’s much-discussed “Asia Pivot,” according to Terada, is an attempt to reinsert the United States into regional political games, as evidenced by a change in the focus and nature of different international arrangements. This shift is perhaps most evident in the administration’s focus on the Trans-Pacific Partnership (TPP) multilateral FTA. The attempt to create a high-quality regional framework consistent with World Trade Organization standards on intellectual property and labor stands in stark contrast to the proliferation of bilateral arrangements, promoted by China, that focus on tariffs and are riddled with exemptions and exceptions.

America’s involvement in the regional order and its preference for standardized rules-based agreements is also evident in changes in Asian security architecture. Previously, regional discussion on security focused on “soft” or non-traditional security issues through a pattern of dialogue stressing consensus and non-interference in sovereign affairs. Since the end of the Bush administration, however, the United States and other democratic nations in the region have begun to construct a rules-based framework that tackles traditional “hard” security issues, such as territorial disputes. This has been marked by a shift away from a focus on the ARF, which has the reputation of being more a discussion session than a meeting with clear political goals, and greater emphasis on more substantive deliberations at the EAS, in which the United States is now a full participant.

Such a shift is a concern for Beijing, which has significant territorial claims in the South China Sea. The body of water is an important fishing ground that has an estimated 23-30 billion barrels of oil under its floor. It is therefore, according to Terada, no wonder that Beijing, thirsty for fuel, sees the sea as an area of strategic interest. China’s claims are contested by numerous states in the region, and Beijing has usually stressed its position on the South China Sea in bilateral talks with these nations. The White House’s insistence on using the EAS to “address strategic and security challenges” by reaffirming “international rules and norms in these areas,” thus poses problems for Beijing’s approach to these disputes. China is therefore engaged is subtle attempts to resist greater U.S. engagement in the region.

These attempts include trying to influence Tokyo’s approach towards regional integration. Japan’s economy is twice the size of the accumulated current membership of the TPP, which does not yet include the United States. Japanese and American membership in the agreement would therefore make the TPP greatly attractive to other potential members, further strengthening American engagement in the region. According to Terada, Tokyo’s interest in the TPP has resulted in a more flexible Chinese stance towards Japan, designed to present Tokyo with alternative options to TPP ascension and other developments that China views in the context of American attempts to enter the region. China has recently been enthusiastic about proposals from Tokyo to discuss, along with Seoul, an investment treaty as part of a broader trilateral FTA, a framework that Beijing previously resisted. China has also been more amenable to Japanese preferences for regional dialogue, as Beijing moves away from its insistence on discussions that include the ASEAN countries and only Korea, Japan, and China (the ASEAN+3 model) and moving towards a broader model, which, in addition to these countries, incorporates New Zealand, Australia, and India (or ASEAN+6). Despite these concessions, Japan is, according to Terada, still committed, particularly in the security arena, to a rules-based order in Asia that includes the United States as a key player.

A complete video of this event can be found here.

By Bryce Wakefield

Robert M. Hathaway, Director, Asia Program

U.S. Announces Tariffs on Chinese Solar Panels

A New York Times article reported that the U.S. Commerce Department announced on March 20 a decision to impose tariffs on solar panels from China, having concluded that the Chinese government provided export subsidies to manufacturers. U.S. firms that depend on the imports of inexpensive Chinese solar panels were relieved that the tariff rates of 2.9 to 4.73 percent were lower than expected, while American competitors to the Chinese firms were not satisfied. However, the Commerce Department is due to decide in May whether these subsidized Chinese imports can be considered dumping. Should the act of dumping be confirmed, tariff rates will be further increased.

China’s rapidly growing green energy industry is clearly demonstrated by the enormous increase in U.S. imports of Chinese solar panels: from $21.3 million in 2005 to $2.65 billion in 2011. Such a fast rate of growth was made possible in part by government subsidies, which stem from the Chinese government’s concern for greater energy and economic security

The authors noted that some experts have suggested looking at the “trade strategies worked out between the United States and Japan in the 1980s to manage Japan’s rapid rise as an exporter.” However, the plan’s feasibility is unclear because U.S. leverage over Japan at the time was probably greater than U.S. leverage over China today. A trade official offered a different viewpoint – Beijing and Washington need to resolve the situation in a “mutually and globally beneficial way,” instead of taking unilateral action.

Posted By: Pokyee Yu

Sources: The New York Times

Photo Credit: solar panels courtesy of flickr user spanginator