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Wall Street History
https://www.gofundme.com/s3h2w8
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12/10/2004
The China Price
The December 6, 2004 issue of Business Week had an extensive
report titled “The China Price” which I devoured on a recent
roadtrip of mine. [By the way, if you’re a golf fanatic and want
to experience something different, check out the PGA’s Q-
School a qualifying event for those trying to gain their playing
privileges on the PGA Tour. I walked all six rounds last week
with one golfer, Bill Haas, and it was a super way to learn more
about the sport and the people around it.]
Following are some snippets from the piece as written by Pete
Engardio and Dexter Roberts.
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--“The China Price” is the term given to the three scariest words
in U.S. industry. “In general, it means 30% to 50% less than
what you can possibly make something for in the U.S. In the
worst cases, it means below your cost of materials.” [Engardio
and Roberts] Industries such as footware and apparel are the
most obvious examples of ones that have been victimized by “the
China Price.”
--“America has survived import waves before, from Japan, South
Korea, and Mexico. And it has lived with China for two
decades. But something very different is happening. The
assumption has long been that the U.S. and other industrialized
nations will keep leading in knowledge-intensive industries while
developing nations focus on lower-skill sectors. That’s now
open to debate. ‘What is stunning about China is that for the first
time we have a huge, poor country that can compete both with
very low wages and in high tech,’ says Harvard University
economist Richard B. Freeman. ‘Combine the two, and America
has a problem.’” [Engardio and Roberts]
--While we think of China as being an export power, its own
market for cars, electronics and now, energy, is booming.
--After years of meeting resistance in cracking the Chinese
market, U.S. multinationals such as General Motors, Procter &
Gamble and Motorola are raking in the profits, particularly as
China’s middle class grows now defined as some 100 million
people.
Regarding the above, however, China’s exports still outstrip its
imports from the U.S. by 5 to 1. “The U.S. sells about $2.4
billion worth of aircraft a year, and its semiconductor exports
tripled in three years. Otherwise the U.S. looks like a developing
nation. It runs surpluses in commodities such as oil seeds,
grains, iron, wood pulp, and raw animal hides.” [Engardio and
Roberts]
---
Separately, in a piece on globalization by Business Week’s
Aaron Bernstein, the issue is raised as to whether the U.S. will
always benefit from it. Nobel laureate Paul A. Samuelson, the
89-year-old professor emeritus at MIT and author of an
economics textbook most college students still use today, is now
questioning whether rising skills in China and India helps the
U.S.
White-collar workers, for instance, have a right to be scared
because of the threat of declining wages. In a study by
economists at Cal-Berkeley, the hit to wages could be powerful if
U.S. white-collar jobs continue to be outsourced. And one
analyst at Forrester Research, John C. McCarthy, has identified
242 service jobs as likely to be affected among the 500-plus
major occupations tracked by the Bureau of Labor Statistics. By
2015 the job outflow in these sectors could total 3.4 million.
Should this be the case, U.S. white-collar wages would get
whacked, according to Harvard University labor economist
Lawrence F. Katz. “Every 1% drop in employment due to
imports or factories gone abroad shaves 0.5% off pay for
remaining workers.” [Bernstein] This may not seem like much
but if the Forrester study is correct it equates to 2% to 3%
through 2015. Most workers in this category of course expect
their wages to go up over time, not down. This impacts
psychology, consumer spending, etc.
Another way to look at it is of those who have lost their job to
outsourcing, 68% found new work within three years but their
average wage declined 10%. [Lori G. Kletzer / University of
California at Santa Cruz]
---
Lastly, in a commentary by Michael J. Mandel in the same
Business Week report, he makes the following point.
“The spectacular rise of China – and to a lesser extent, India – is
one of the great events in economic history. If the current rate of
expansion continues, in a mere 10 years China will be the largest
economy, followed by the U.S. and India. The last time the
world economic order was so dramatically transformed, the U.S.
was the muscular newcomer. In 1820 the collection of former
British colonies had a significantly smaller economy than any of
the leading European countries. In 1913, on the eve of World
War I, the U.S. was the clear global leader, with double the
output of its nearest rival.”
But back in the above period America’s success didn’t come at
the expense of Europe as their own economies continued to
grow, albeit at a slightly slower pace. As Mandel points out both
the Europe and the U.S. were able to feed off each other’s
technological advances; examples being the transatlantic
telegraph cable (a joint U.S. / British venture) and the telephone,
exhibited in Britain just six months after it was invented by
Alexander Graham Bell in March, 1876.
What’s different about today, though, in Mandel’s view, is that
“the shift in manufacturing to China does make the U.S. more
vulnerable to political and financial shocks to the global trading
system in new ways. Those disruptions could be widespread
terrorist attacks that disrupt transpacific shipping, a sudden run
on the dollar that forces the Chinese central bank to stop buying
Treasury bonds, or even the collapse of the Chinese banking
system, which is burdened with huge amounts of bad loans.”
The bottom line, according to Mandel, is that the “strengthening
nexus between the U.S. and Chinese economies is a good thing
for both countries – as long as trade is not interrupted.”
But then you go back to the wage issue not good.
---
I’m off to Latin America for a little bit but will have something
for December 17, assuming my Internet connections work down
there.
Brian Trumbore
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