Is China Really an Economic Threat?

China’s successful oversight of the 29th Olympiad has predictably raised questions and commentary about issues extending beyond the host’s growing prominence on the fields of play. Some are asking whether China’s athletic dominance will translate more and more to economics, and if so, the question is one of whether or not this is a threat.

By definition it cannot be.

For one, talk of China’s economic rise is greatly overdone thanks to the size of China’s population. While it may be true that China’s economy will be larger than ours by 2020, it will still be a very poor country with average incomes much smaller than those enjoyed in the United States. Goldman Sachs predicts that even by 2050, the average Chinese citizen will earn an income half of the U.S. average.

Happily, the above is really pretty irrelevant. As George Mason professor Donald Boudreaux reminds us in his essential book, Globalization, when we look at trade from an individual’s perspective (the only way to look at trade), said individual would be shockingly poor absent the ability to exchange the fruits of his labor for the surpluses of others.

The true mistake when we consider trade is to view it from a country or border perspective. In truth, it doesn’t matter where a good is made because rather than enervating, trade lifts us. Just as our exchanges with the local grocer free us from backbreaking farm work, so do imports from around the world move us even more toward the very economic specialization that enriches us.

That being the case, the best scenario for the average American would be for China’s economic growth to lift its citizens even higher, and at a much faster rate. If so, Americans and the rest of the world would be able to enjoy an even greater influx of cheap goods that would enhance our standard of living alongside more efficient deployment of our individual human capital.

Put simply, we must think of the Chinese and other rising economic locales in the way we think of computers. Computers arguably destroyed more jobs than any invention in history, but rather than impoverishing us, our embrace of them allowed many of us to more productively go about our existing jobs, and for others the productivity wrought by computers attracted capital that created new, higher paying employment.

Surprisingly, China’s economic rise has some prominent economists on edge. C. Fred Bergsten of the Peterson Institute says China is “challenging some of the fundamental tenets of the existing (global) economic system;” its alleged export-led economic growth “predatory” in nature.

Nothing could be further from the truth. That is so because there’s no such thing as “export-led growth,” let alone “predatory trade.” More realistically, as producers all, we trade products for products. Chinese producers are only able to export goods to the extent that the buyer on the other end is creating tradable goods that have similarly been exported; the country destination of those goods totally irrelevant.

Importantly, Chinese companies aren’t exporting out of love or benevolence. Instead, they make for the world saleable goods that will enable them to succeed at their main goal: imports. Indeed, whether a Shanghai-based firm is producing for customers in Beijing or Baltimore, in both instances this is done with the purchase of something else in mind.

What also has to be remembered is that imports into any country or region are the ultimate compliment; the imports a signal that the region or country in question has first made something the markets value such that there exists capital to import something else. Trade also can’t be predatory given the truth that it occurs between two consenting individuals who enter into an exchange arrangement with the desire to get something they value more.

Some would say that Chinese citizens often skip the “import” or buying part, and while the proliferation of cellphones, cars and Western-style houses over there certainly belies this assumption, even if true it would be unimportant. That is so because money saved hardly detracts from demand. Instead, money saved is merely lent out to businesses and individuals with near-term needs for employees and all manner of consumer goods.

Economist Robert Samuelson fears that China’s rise will “destabilize the world economy” thanks to huge “financial imbalances” and “contentious competition for scarce raw materials.” Samuelson’s fears are similarly overdone because just as productivity in Duluth accrues to economic activity in Dallas, so will Chinese growth be ours, and ours theirs. This is the happy result of an integrated world economy. Whenever we think of trade with anyone anywhere, we must always think of the local grocer who enabled us to leave the farm.

Where “financial imbalances” are concerned, what Samuelson presumes cannot be. That is so because all trade by definition balances. In truth, it is a physical impossibility for the U.S. to have to finance its alleged deficits involving trade. Instead, to the extent that we’re productive, we’ll attract imports. Nothing is free.

When we consider competition for “scarce raw materials”, this too is a misnomer. Instead, individuals rather than countries will access what they need. To the extent that actual demand makes some resources dear, far from an inflationary event, this will merely foster substitutions, or more realistically drive the intrepid among us to find that which is in short supply.

What’s interesting about the above is that Samuelson decries currency manipulation; in particular Chinese manipulation of the yuan “at artificially low levels.” Samuelson gets it backward. It’s been the failure of U.S. monetary authorities (and other countries that have sadly followed our lead) to properly manipulate the dollar’s value with an eye toward stability that explains expensive raw materials mostly expensive today thanks to a weak dollar.

Importantly, the value of any currency is mostly immaterial. Currencies are in the end insignificant except as measuring rods that foster trade. So when we address competitive devaluations, the enemy is us. Had we not the left the currency stability that was the purpose and result of the post-WWII Bretton Woods monetary agreement, other countries would have had less reason to follow our lead down an inflationary path these last 37 years.

Looking ahead, it should be hoped that we and our trading partners ignore rhetoric suggesting free trade or China or both are somehow threatening. More threatening would be an inward turn against beneficial individual exchange imposed by governments that would lower personal standards of living worldwide, all the while forcing workers to use their talents in sub-optimal ways.