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China is getting a bad trade-gap rap

China is getting a bad rap for taking U.S. manufacturing jobs, but other Asian countries are merely moving their factories into the country.
/ Source: BusinessWeek Online

With the U.S. presidential election only 13 months away and the American economy stuck in low gear, politicians in Washington are eager to show voters that they’re doing something — anything — to address worries that the U.S. is losing jobs to low-cost rivals in Asia. China, thanks to its gigantic trade surplus with the U.S., is a favorite target.

INDEED, CAPITOL HILL has no shortage of people accusing Beijing of keeping its currency — the oft-mispronounced yuan — too low. (The correct pronunciation is ewe-en.)

What’s going on in Washington is causing alarm among many China watchers. Fred Hu, a managing director at Goldman Sachs in Hong Kong, says the China-bashing “has serious potential to do a lot of damage.” He’s concerned by some of the proposals he’s seeing from lawmakers, such as a call to impose tariffs on Chinese goods unless China revalues the yuan. That’s “sheer madness,” says Hu. “It won’t help U.S. jobs — but will really hurt U.S. consumers.”

Hu thinks China is getting a bad rap, since most of its exports to the U.S. are the result of factories moving from elsewhere in Asia. “The U.S. trade deficit with East Asia as a whole has remained stable,” Hu says. China has a big surplus, he argues, in part because companies in Japan, Korea, and Taiwan have shifted their export-oriented industries to China.


The numbers support that argument. Last year, China had $300 billion in total imports, and exports were just a little over the same amount. Hence, China’s overall trade surplus was modest, even though the figure with the U.S. was $103 billion. But when it comes to the rest of Asia, China has a trade deficit that’s probably $60 billion. The deficit with Taiwan alone is $30 billion.

Jonathan Anderson, an economist at UBS in Hong Kong, agrees that all the talk about China stealing American manufacturing jobs doesn’t make sense. When it comes to manufacturing, he notes that the Chinese are strong in sectors that aren’t big parts of the U.S. economy, such as light industry. China now exports lots of PCs, for instance, and not many American workers were making computers.

“The bottom line is that there aren’t a lot of those jobs left in the U.S.,” Anderson says. “The average U.S. manufacturing worker is an auto worker or a steel worker, and the competitors are Japan, Europe, maybe Korea — but certainly not China.”


How much value-added does China get from all of its electronics exports? Not much, according to Anderson. “About 75 percent of the value-added is imported, from Taiwan, Korea, Japan, whatever,” he says. “The one thing that they do get is a hell of a lot of jobs.” The total manufacturing work force in China is probably over 100 million, and 35 percent are in export-related manufacturing.

Hu says Americans who contend that China is following the old Japanese mercantilist model of economic development don’t understand the Middle Kingdom. “China cannot be more different from the old Japan,” he says. “It’s more like an Anglo-Saxon model rather than a Japanese model.”

Unlike Japan at a similar stage of development, China welcomes foreign investment, has relatively low tariffs, and has opened up its service sector to outside competition. Also, China’s trade surplus is actually quite small, since it imports so much from other Asian countries.


Still, there’s no denying that Chinese leaders are almost obsessed with winning more manufacturing jobs. “There’s a heavy reliance on the export sector to create jobs and absorb pressure,” says Jun Ma, an economist with Deutsche Bank in Hong Kong and a former World Bank economist. With unemployment in China’s cities probably around 8 percent to 10 percent, “China has to maintain 15 percent to 20 percent export growth per year to be in a position not to increase the urban unemployment rate a lot.”

Ma says China has to create 10 million urban jobs each year just to absorb all the rural migrants, an additional 2 million to 3 million jobs for the people laid off from state-owned enterprises, and a further 2 million for the young people entering the workforce. Export growth “is a practical strategy to meet the No. 1 priority, which is domestic political stability by economic-policy tools,” he says.

With China gaining jobs and the U.S. losing them, the tension is likely to heat up even more. UBS’s Anderson expects that Beijing will eventually make some changes to its currency. “Gradually, China is going to introduce more flexibility, but it’s going to be very slow and not very meaningful in the near term,” he says. That’s one reason that Anderson expects the current tension to continue and why China will continue to be a “target.”

Since it looks like the folks on Capitol Hill will be talking about the yuan for a long time, at least maybe they can remember how to say it: ewe-en.

Copyright 2003 The McGraw-Hill Companies Inc. All rights reserved.