A Direct Correlation: China’s Growth Comes At The Expense Of The United States

By Richard A. McCormack
richard@manufacturingnews.com

As China rises, American tumbles. That is the story told by a new report from the United States-China Economic and Security Review Commission describing the economic performance of the United States and China since China was admitted into the World Trade Organization in 2001.

In virtually every important economic indicator, China has been growing at exponential rates while the United States suffers death spirals in jobs, income, wealth and prestige. “You can’t fudge the numbers,” says Charles McMillion, president of MBG Information Services and author of the report, “China’s Soaring Commercial and Financial Power: How It Is Affecting the U.S. and the World.”

For the past 10 years, China’s economy has grown four times faster than the U.S. economy, and the U.S. economy has grown slower than the world economy. An economy that is growing slower than the world economy should have a trade surplus, yet the United States over that period has racked up $6 trillion worth of deficits. China’s surpluses have reached $2 trillion, a huge number for an economy with an annual GDP of $4.5 trillion. China has done this with “fundamentally protectionist policies” that have “broadly undermined the most productive sectors of U.S. industry,” according to McMillion.

The consequences of the U.S. government’s decisions not to aggressively pursue China’s trade practices have proven tragic for millions of Americans. “We simply could not sustain this level of debt and when something is unsustainable it stops and sometimes it stops unpleasantly,” says McMillion.

Because of massive trade deficits with China, “every U.S. manufacturing sector lost a substantial portion of its jobs as did virtually every sector that is exposed to imports from China or offshore outsourcing,” according to McMillion. “The broad, once incomparable and dynamic U.S. supply chain of manufactured goods and services is clearly weakening and shifting quickly to China.”

The U.S. textile industry has lost 63 percent of its jobs since 2001. Communications equipment has shed 47 percent of its jobs and motor vehicles and parts has lost 43 percent of its workforce since 2001. That industry has suffered more than $1 trillion in global trade deficits over the past eight years. China has now surpassed the United States as the world’s largest automobile market and is expected this year to surpass Japan as the world’s largest auto producer.

China is out producing the United States not only in cars but in televisions, cell phones, steel, semiconductors and aluminum. China surpassed the United States as the world’s largest export nation in 2007. The United States ranks behind Germany in that category as well.

In the important “advanced technology products” sector, the United States ran its first trade deficit in 2002, and losses have ballooned since. “Traditional U.S. strengths in aerospace production are now threatened and even semiconductor production, one of China’s key technology weaknesses, is now quickly migrating to China,” says the study.

Things could get even worse for America. “Now, urgent cost-cutting pressures in the economic crisis provide further incentives for U.S. consumers, businesses and government agencies to displace domestic [U.S.] production with cheaper imports or offshore outsourcing even as debt soars,” according to the study.

China is now home to the world’s largest bank, insurance company and telecommunications firm. It has the world’s second largest oil company and holds the largest reserves of foreign currencies of any nation on earth. Its political leadership is now “lecturing the U.S. on economic management,” notes McMillion.

Industrial production is on a steady upward trajectory in China, but not in the United States. In February of this year, U.S. industrial output declined to a level that was 3 percent lower than in February 2000. It is the first nine-year decline since the period from November 1929 to November 1938, writes McMillion. “There were fewer private sector jobs in the United States in February 2009 than there were in February 2001, for the first eight-year decline in private sector jobs since 1927 – 1935. Net worth per capita is down 6.2 percent from 2000 to 2008. Federal debt is projected to increase by $2.72 trillion in 2009, roughly three times the total federal debt accumulated in its entire history (including the Civil War, depressions, and two world wars) before 1980.”

The response to this economic calamity are warnings against “protectionism from global importers and even from China,” notes McMillion. “It is, perhaps, understandable that large, self-interested global firms, wherever they are incorporated, champion unregulated commerce and finance. But China’s recent, elevated rhetoric aimed at the U.S. is especially hypocritical. Indeed, vigorous “protectionism” is the very core of China’s public policies and of its remarkable recent success. It is the reason China devalued its currency by 50 percent in January 1994, why it has so carefully managed its currency ever since and how it has amassed $2 trillion in foreign currency reserves since the Asian financial crisis of 1998. Protectionism is why China maintains strict government ownership of its banking and financial firms, even as they have gained access to world equity and bond markets.”

China is doing whatever it can to beat the United States in global trade. “It increased export rebates to 17 percent in January 2009 for industrial robots, inertial navigation systems for aviation and 551 other types of high tech and high value-added electrical and non-electrical machinery and parts and to 14 percent on exported motorcycles and various appliances,” notes McMillion. These border adjustable taxes are allowed under the rules of the World Trade Organization, and every country in the world uses them to their advantage in international trade, save for the United States.

The original article is found at Manufacturing and Technology News. I ranted about this very subject two days ago here.

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5 thoughts on “A Direct Correlation: China’s Growth Comes At The Expense Of The United States

  1. Pingback: A Direct Correlation: China's Growth Comes At The Expense Of The … | China Today
  2. Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the wealthiest nation on earth – its preeminent industrial power – into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It’s a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, exceeds $9.2 trillion. What will happen when those assets are depleted? Today’s recession is the answer.

    Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

    Clearly, there is something amiss with “free trade.” The concept of free trade is rooted in Ricardo’s principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn’t consider?

    At this point, I should introduce myself. I am author of a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

    This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It’s because these effects of an excessive population density – rising unemployment and poverty – are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

    One need look no further than the U.S.’s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

    Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable – nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn’t a problem, but rather that it’s exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world’s population.

    Ricardo’s principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

    If you‘re interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It’s also available at Amazon.com.)

    Please forgive me for the somewhat spammish nature of the previous paragraph, but I don’t know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

    Pete Murphy
    Author, “Five Short Blasts”

    • Mr Murphy,

      I have been very slow in responding due to many personal matters. I appreciate, greatly, your participation here and providing a link to your work. Nicely done.

      B’Man

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