China's Economic Rise Is Truly Glorious
It's very difficult to pick up any kind of financial publication these days without reading about China's growing economy, and what this means for the economic health of the United States. While an enhanced division of labor has traditionally been viewed as bullish for all who participate in what is a "closed" world economy, China's rise is increasingly seen as a threat to the U.S. for its ever-expanding workforce making ours less relevant.
Not only is China's economy presently the third largest in the world, it can now lay claim to being the largest market for automobiles in the world. Visitors to Shanghai alone can look up at a skyline dotted with 3,780 skyscrapers versus 15 in 1978.
To hear the self-proclaimed experts, Chinese workers in the manufacturing space - whose daily pay would merely buy a Starbuck's latte in the U.S. - are luring quality jobs from the U.S. In addition, China's peg of the yuan to the dollar at an allegedly low rate of exchange is driving up our trade deficit with the growing nation; the trade deficit supposedly making more troublesome an already bleak jobs picture.
Worse, to believe eminent figures such as Federal Reserve Chairman Ben Bernanke, demand from China is driving up the cost of all manner of commodities, most notably oil. Unless China's rise is checked by managed trade flows, its growth will reduce ours in concert with rising inflation due to insatiable demand for commodities from its citizenry.
If these experts are to be believed, the 21st century will be China's in concert with the U.S.'s inevitable economic decline. All of this is compelling at first glance, but the greater truth is that in an interconnected world economy, it could more realistically be stated that China's success is ours, and ours China's.
China's Economy Set to Become the World's Largest
Merrill Lynch economist Ting Lu notes that it will take just a few years for China's economy to grow larger than Japan's, and in a few decades he sees China's GDP rising above that in the United States to make it the largest economy in the world. A meteoric rise for sure, but one obscured by greater realities.
For one, more than half of China's impressive GDP growth is the result of government spending and foreign direct investment. If the largely illusory impact of government spending is ignored, a look at foreign investment alone reveals that a lot of the growth that has China's detractors fearful should not be a worry.
Indeed, as Robyn Meredith observed in her 2007 book, The Elephant and the Dragon, "only four of China's top twenty-five exporters are Chinese companies." In short, much of investment-driven expansion in China accrues to foreign companies with operations there or, as Meredith put it, "if China exports a shoe that sells for $100 in the United States, just $15 of the price stays in China in the form of workers' wages, transportation costs, or other value. American companies keep the remaining $85." Meredith found that much the same occurs when $700 computers are exported from China; Chinese producers taking roughly $15 of the total sale.
Considering its presumed ascendance to the top of the world's economic heap, no doubt due to its population, China's GDP should certainly eclipse that of the U.S. in time. But it seems there that the worries over economic harm felt stateside due to this largely symbolic leap are greatly overdone.
For one, given China's population, when its economy eventually does become the largest in the world, it will still be a very poor country. Right now, and despite massive growth since economic liberalization began in the late 1970s, Chinese per capita income is still very small, and at roughly $3,000 per citizen, a small fraction of the earnings enjoyed by the average American.
Secondly, as a country populated with companies very much reliant on U.S. demand, it can't be stressed enough that China's citizens can only become truly wealthy if at the same time wealth per capita in the U.S. continues to increase. Looked at from a Classical point-of-view, as individuals we produce in order to consume, which means China's fortune will very much be a function of our continued economic growth stateside. For China's citizens to become truly wealthy, this will have to occur in concert with similarly rising wealth in these fifty states.
We're Losing Jobs to China
Perhaps due to the relatively weak U.S. economic outlook of recent vintage, there's a growing view that the massive influx of mainland Chinese into the country's labor force could spell doom for the average working American. That daily factory pay in China would buy a latte in the U.S. is seen by some as further evidence that China is poised to overtake the U.S. as jobs flow to what remains a low-wage country.
What's missed here, however, is the greater truth that jobs themselves are merely a function of investment. Wherever investment flows reveal themselves, so do jobs. As such, the only limits to our ability to create work in the United States are taxes, tariffs, regulations and poor policies with regard to the dollar which repel investment. If the aforementioned barriers are light, investment and the jobs that come with it won't be a problem.
Using China's relatively high wage rates vis-à-vis Africa, India and other less developed Southeast Asian nations, if low wages were the only factor in investment flows, China would similarly be losing jobs to its poorer neighbors. Instead, thanks to worker productivity there that presently eclipses that in countries such as India, investment continues to reach China's mainland.
Looking at labor-force participation rates in the U.S., if we use the 1970s as the decade when economic globalization really began to pick up speed, it can then be said that there's very little correlation between an increase in the worldwide division of labor and reduced job opportunities stateside. More realistically, it should be said that with globalization has come grater U.S. labor-force participation alongside better jobs.
Indeed, according to economists Bruce Greenwald and Judd Kahn, overall participation in the U.S. labor market was 60.3 percent of the adult population in 1970, compared to 66.1 percent in 2005. And while it's fair to assume that the percentage employed has declined more recently, it seems a better explanation as to why has to do with a weak dollar which has driven what is limited capital away from the growth parts of the U.S. economy, and into hard assets as a hedge against inflation.
Even more exciting for a country such as the U.S. whose citizens fear China's growth is the mix of jobs that has resulted from what we term, "globalization." As Greenwald and Kahn have found, since 1970 the "most rapidly growing job category has been Managerial and Professional employment", whereas "the only category to decline in absolute numbers was Operators, Fabricators, Laborers, and Farmers, largely manual work."
In short, while low-wage, low productivity jobs have perhaps migrated to China and other developing countries, they've been replaced by more valuable, higher-paying work. To put it very simply, the evolving U.S. economy has shed low-value positions in order to free up what is limited human capital for higher paying positions. A better, more wealth-enhancing tradeoff would be hard to fathom.
China's Skyrocketing Demand Is Inflationary
Back in 2007, in a speech given to the Stanford Institute for Economic Policy Research, Fed Chairman Ben Bernanke questioned whether increased worldwide economic integration had actually driven prices lower. Bernanke concluded that it had not, that "there seems to be little basis for concluding that globalization overall has significantly reduced inflation," and that, "Indeed, the opposite may be true."
In the speech, Bernanke pointed to demand from China and other formerly dormant countries as major contributors to rising energy and commodity prices in recent years. He also cited a study that showed oil prices in 2005 would have been as much as 40 percent lower absent demand from those economically resurgent countries.
But as numerous H.C. Wainwright publications over the years have made plain, commodities such as oil weren't then nor are they now expensive, as much as the dollar this decade has been very cheap. No country or collection of countries could ever profoundly increase the cost of any commodity, but as the ‘70s and this decade revealed quite clearly, periods of dollar weakness have regularly coincided with nominally expensive commodities priced in dollars, including oil.
Assuming a scenario whereby Chinese demand were to drive up the real price of goods like oil, it can't be stressed enough that this would in no way be an inflationary event. That's the case due to the economic reality telling us that if demand is driving up the price of one good, it must be that there's less demand for other goods, thus driving the price of them down over time.
Conversely, it should also be said that just as China's economic influence is not inflationary, so is it also not deflationary. Indeed, rather than driving the U.S. or world price level down, cheap Chinese exports merely expand the range of goods within our reach.
If cheap computers made in China make them more accessible, their low price simply enables increased demand for goods previously unattainable, thus increasing the prices of other goods over time. Inflation and deflation are purely monetary in nature, and with China's currency policy a function of U.S. dollar policy (more on that below), any inflationary pressures are American in their origin.
This will be the case no matter how much China's economy grows. Returning to Classical first principles, one can only demand after supplying first. In China's case, rising demand from individuals on the mainland is the tautological result of rising supply from its citizenry, which means its impact on the price level is nil.
China Keeps Its Currency Artificially Weak to Stimulate Exports
Economist Peter Morici opines that China's "undervalued yuan makes Chinese exports artificially cheap and foreign products too expensive in Chinese markets." Morici's view here is that China's economic strength requires a stronger yuan, one that if not pegged at a low level to the dollar would make U.S. exports more competitive and drive down high levels of unemployment in the States.
If we ignore for a moment the economic tautology telling us that all trade by definition balances, Morici's thinking confuses the purpose of currencies. Rather than commodities as Morici suggests, currencies are simply concepts meant to facilitate the exchange of products. When we buy anything, we're not so much exchanging money as we're trading products for products; money the measuring rod that saves us from simple barter.
More important, as Ludwig Von Mises long ago observed, "the valuation of the monetary unit depends not upon the wealth of the country", and as such, "the richest country may have a bad currency and the poorest country a good one." Looking at the U.S. and China, the value of the dollar and the yuan's value vis-à-vis the dollar is really not relevant.
Instead, it's the stability of the two currencies relative to each other which ensures a great deal of exchange between individuals in each country; trade for that which we don't have in exchange for that which we do the reason we produce to begin with. In that sense, the yuan's peg to the dollar has been a smashing success judging by a 446 percent increase in U.S. exports to China from 1999 to 2008 alongside a 312 percent increase of Chinese exports to the U.S. over the same period.
As for employment, far from a job killer, the aforementioned statistics covering labor-force participation and quality of work show that an enhanced relationship between individuals in both countries has been undeniably good for the average American. The only shame here concerns the weak-dollar stance this decade of the Bush and Obama administrations, which has weakened each country economy as investment on the margin sought real assets to the detriment of growth opportunities in both countries.
Particularly in times of economic uncertainty, it's perhaps natural that we look past our borders for answers explaining why we suffer. China is a natural target given its impressive economic growth, some of which has served as a magnet for jobs that used to employ us on U.S. soil.
Looked at more critically, however, we see that China's rise, far from reducing our economic opportunities, has in fact expanded them as low value, often menial jobs have moved offshore in favor of more valuable, increasingly professional work of the service variety. This has occurred alongside an influx of Chinese imports that signal increased productivity on our part, all the while enhancing our living standards.
To presume that China is an economic threat is to embrace a scary, counterproductive form of thinking which says that trade is in fact war. In truth, trade is the underlying reason for why we all work, and as such, the more China's economy grows thanks to its exports to the U.S., the more we must be increasing our own individual wealth positions in order to pay for those imports.
In the closed economy that is the world economy, an enhanced division of labor is undeniably good for us all for it enabling greater specialization in the areas of work we're best at. In short, China's success is ours, and ours China's.