“On China – and Trade”
I was thinking about China, and the trade dialogue, etc. Now, I don’t much like the dialogue or the processes, or the big egos, etc. However, I fully agree there are issues, and I only wish they were being pursued more in silence, where big egos don’t dominate everything. Really crazy, shitty, negotiating approach.( I wish our folks were reading Harold Nicholson on diplomacy.) At the same time, I have always been suspicious about the arguments that China will over whelm us, etc. perhaps because we went through this once before, in the 70’s, with regard to Japan. If interested, take a look at the book, Head to Head, by Lester Thurow, that forecasted Japan’s economic primacy over the US by 1980. Very similar conversation to that occurring today. Didn’t happen. Turns out their overly controlled industry, including the integrated keiretsu, stifled market adjustments, and slowed them down, almost to a halt for a while. Our crazy, noisy, democratic capitalism overwhelming allocates capital to where it gets the most return, like it or not. Markets tend to make better aggregate decisions than humans – the pie gets maximized – but certainly humans can play a role in making adjustments. (Just don’t pollute markets as the tools for making those adjustments. Don’t hide behind markets. Have the courage to make the adjustments as enlightened social policy.) Here are some thoughts to consider, with some of the data from a WSJ article. The US GDP per capita is close to $60,000. China’s is about $9000. Actually, that is quite remarkable, given the size of China, 1.4 billion people. But, their working population is declining, as they age, and it is a bit less than a billion. This is actually quite a problem for them. Their return on invested assets was 13% in 2004, and has declined to 8%. So, 7% annual growth is no guarantee for the future. We read about great companies, like Tencent, a firm perhaps sitting in most managed portfolios for technology companies, but few take the time to recognize how involved is the Chinese government in Tencent. Specifically, steering Tencent investment decisions to ailing state giants. This isn’t happening with Google, or Facebook, or Apple, or Microsoft, or IBM. But it seems to happen with the largest and most successful Chinese firms. That doesn’t exactly make them a more formidable competitor. In dollars, China is about 14% of world exports. Of that, perhaps 22% of that goes to North America, that is, the NAFTA countries, not just the USA. We are about 9% of world exports. Back of an envelope calculation puts our exports to China at around 9% of our total exports. Importantly, these kinds of statistics tend to understate, or not state at all, export of services, which are much harder to tariff. Services now dominate the US economy. One other thing. I heard reports that Chinese tariffs are already hurting US consumers. I believe this is nonsense because these kinds of “taxing” adjustments – the heart of Government fiscal policy, by the way – take many months to work their way through the economy, perhaps as long as 18 months. Where it may immediately hurt is with the value of Chinese currencies, which is speculation in action, which may cheapen their goods almost as much as the tariffs will make them more expensive. Interestingly, exports account for about 20% of the Chinese economy. Surprise you? That’s much less than U.K., France, Canada, Mexico, Iran, Russia, and Germany, at 47%. The only conclusion I would ask you to draw from this is that the yelling and screaming must stop. It is not helpful. Better to use our brains, and the real data, to strategize – now there’s a stage word – how we effectively compete with China on our so small planet.
