Too Much Ado about China
No country raises more suspicion in America than China. For one, it's big and it's far away; size and distance arouse suspicion, because size and distance stimulate our imagination to run amok. Citizens in big, faraway lands inflate into superior beings -- people with more discipline, stronger work ethic, and higher intelligence. This, in turn, deflates our own self-confidence.
Suspicion is prevalent on both sides of the political aisle. The left sets China as a job-devouring bogey, whose appetite is as voracious as any 800-pound cable-television curiosity. The right laments China's economic ascension, which could topple the United States from its envious (from a political perspective) perch.
Like most fears propagated by political opportunists, the fears are overwrought and overdone; the aggregate numbers the opportunists use to buttress their fear-mongering are so very misleading.
If one were to glance only at the aggregate numbers, one would think there is an injustice afoot. The contemporary trade data, June 2012, show that the United States exported $8.52 billion's worth of sundry goods and service to China, but it imported $35.92 billion. The current ratio of imports to exports is roughly the norm over the past five years. Does that mean that China is exporting goods and services that could be produced in the United States using domestic labor, thus resulting in exported jobs?
It's not that simple. Aggregates scrub data of their individuality, so the "Smiling Curve" goes under-reported and under-appreciated. The Smiling Curve is a U-shaped function that captures a product's life cycle. It's U-shaped because the ends represent the high-value processes. At the right resides a company's brand, product conception, and design and engineering. At the left resides marketing, distribution, retail sales, and service contracts.
Chinese businesses, for the most part, specialize in the sagging middle -- manufacturing and lower-level design engineering. In other words, U.S. businesses specialize in the higher-value processes; Chinese businesses specialize in the lower-value processes. The problem is that when that $1,000 laptop hits the port at Long Beach, it's logged in as a $1,000 import, though much of the work and value is created in the United States.
To be sure, the sagging middle processes China performs guarantee that those same processes aren't performed in the United States. So, to state the obvious, yes, those manufacturing jobs have been outsourced overseas, but they are no longer value-adding jobs. If a task can be performed more efficiently and less expensively elsewhere, then that task should go elsewhere. If it doesn't, then owners and customers suffer, and so eventually does the business.
The good news is that the outsourced jobs create opportunities for new jobs. It appears counter-intuitive, but outsourcing is correlated with increased U.S. employment and investment. On the whole, businesses that outsource are not shifting jobs overseas, but instead are creating jobs in the United States. This makes sense: labor is scarce and finite; different regions of the world have comparative advantages compared to other regions. And even if one region can do everything better than another region, it still makes economic sense for the superior region to concentrate on tasks where it has the greatest comparative advantage and then trade for the rest.
Semantics is important when discussing regions -- in this case, the United States and China. Trade occurs not between countries; the United States does not trade or outsource to China, or vice-versa. Individuals and business within each country trade. An individual in the United States purchases a laptop designed and engineered by workers in the United States and manufactured by workers in China. Transacting and trading occur between individuals, not countries.
Speaking in terms of individuals instead of countries tempers nationalistic zeal. One of the right's more pressing worries with China is its growing stature as an economic power.
The International Monetary Fund predicts that China will surpass the United States as the world's economic power in 2016. Such predictions are mostly fantasy. What does it mean if China's annual gross domestic product exceeds the United States' gross domestic, and China becomes the world's leading "economic power"?
First, terms need to be defined: what's an "economic power"? If it's a country whose citizens are free and able to create value and wealth, that's a good thing. China has 1.3 billion citizens; the United States has 315 million. Shouldn't the more populated country, all else equal, generate more value and wealth in total? And if it does, so what? China ascendency doesn't translate into a United States decline.
"Economic power" is really a misnomer. Power implies force and coercion; value and wealth are created through neither. Power implies a zero-sum game -- like a sporting event, war, or a political contest -- where one side wins and the other side loses. Commerce is much more about cooperation than competition. Most of the day is passed appeasing owners, bosses, and clients. Little of it is spent butting heads directly with the competition.
Conflict arises when "economic power" is used synonymously with military power. Greater economic affluence provides a larger base from which government can expropriate resources for military advantage. The United States government has historically enabled economic prosperity, which has enabled the United States government to expropriate a large portion of GDP in absolute terms for the military. The United States government accounts for 43% of the world's military spending -- spending six times as much as China's government.
The fear is that China's growing prosperity will provide its government a larger base from which to draw more military power. The irony is that the right's saber-rattling on this fear motives China's government to draw more military power from the economy, thus producing a self-fulfilling prophecy. Doesn't it make more sense to just shut up and let commerce between the two regions flourish?
The fear is a remnant of the Cold War, but communism is dead everywhere, having been supplanted by fascism. China is a one-party state, and that in and of itself isn't bad if that one party is a party of property rights, free markets, and an open society. China's government is none of these; China is run by fascists. They permit some private-property ownership and commerce, but principally to regulate and profit from it. Profits to the government are hardly maximized by agitating your largest, most affluent trading region.
The real issue isn't China's rising ability to generate wealth; it's the United States' rising inability to generate it. Fascism -- increased regulation, nationalism, and corporatism -- is on the rise in the United States. Though fascism is at a higher level in China, China's economy is growing from a low communist-ravaged base, hence the more impressive annual GDP growth rates.
Fomenting bogeymen in distant lands is the cheapest political trick. China's, India's, Russia's, Brazil's, or whatever country's citizens gaining economically are not gaining at the expense of United States citizens. They are gaining because their governments are loosening the tethers and permitting them to gain.
If United States citizens lag other countries' citizens in creating value and wealth, they have only themselves to blame, because they are allowing more wealth-sapping fascism into the economy and allowing themselves to be fooled into believing the blame for lower economic growth resides elsewhere.
Stephen Mauzy is a financial writer and principal of S.P. Mauzy & Associates. He can be reached at email@example.com.