Because Rome wasn’t built in a day, a month in which the economic policy establishment dispels two major myths about China’s economy and perpetuates only one is a month to celebrate. Here are the details.
Dispelled myth number one has to do with the distinctive nature of China’s trade, which makes a mockery of conventional notions of exports and imports, but which is routinely ignored in order to convey the impression that the PRC’s markets have been substantially open to American exports and remain so. This claim is central to the offshoring lobby’s insistence that anyone supporting curbs on U.S.-China trade must have rocks in their heads because such a move would cut the U.S. economy – including U.S. workers – from a customer base that is one of its biggest, fastest growing, and potentially most important.
But here’s the rub: As with America’s trade with many of its competitors, especially in the third world, its exports to China do not consist mainly of sales of finished products that are consumed in China. Instead, they’re either (a) parts, components, and other inputs (like materials) of finished goods that are sent to China for assembly and then re-exported (often right back to the United States); or (b) capital equipment used in Chinese export factories or in the construction of China’s export infrastructure (e.g., ports and airports and the roads and bridges leading to them).
Worse, many of these Chinese factories supplying the U.S. market used to be U.S. factories supplying the U.S. market that employed U.S. workers. They’re now located in China either because the offshoring-heavy business models of U.S. multinational companies put them there, or because facilities originally located in America were driven out of business by predatory Chinese trade practices and replaced by their Chinese competition.
In other words, many of America’s exports to China don’t satisfy foreign demand for U.S.-origin products that adds to American growth and hiring on net because it exists on top of existing domestic demand. Instead, they satisfy existing U.S. demand that was once supplied by American facilities and workers. As a result, ultimately these exports don’t fuel the U.S. economy’s growth and job creation. They fuel its trade deficits and overall indebtedness.
The importance of this processing trade to China’s economy is no secret to academics and other China specialists. (I devoted an entire chapter of my book on globalization, The Race to the Bottom, to this “new kind of trade.”) But it rarely makes its way into news coverage of U.S.-China economic relations and controversies, and almost never into Congress’ deliberations or speeches by U.S. presidents and their aides.
That’s why it was especially gratifying to see a Bloomberg article yesterday on the new monthly trade figures reported by China mention pointedly note that the surge in China’s imports recorded in September stemmed largely from purchases of processing trade goods destined for export markets, not the Chinese market. As an analyst quoted in the piece specified, “Import growth in September is heavily driven by external demand and the processing trade industry, instead of domestic demand.” Exactly. And he rightly suggested that the September import increase was anything but exceptional: “China’s economy at the current stage is still kind of externally demand-driven.”
The second myth debunked in October is closely related to the first. As I explained in one of yesterday’s posts, because China’s economic growth has long been driven powerfully by amassing trade surpluses, this growth has subtracted from growth in the rest of the world on net, rather than adding to it. China’s apologists – along with the Chinese government – continue working hard to obscure this reality. But they – along with the Chinese government – keep implicitly admitting “guilt” by emphasizing how thoroughly Beijing understands that it must “rebalance” its growth to ensure that more is led by domestic demand.
Since the financial crisis struck, one of the main developments cited to show that this shift is taking place – however inadequately, it’s frequently noted – has been the huge increase in investment recorded in China’s economic output (gross domestic product) figures. There’s no doubt that much of this investment has indeed been domestically focused, principally in the housing sector, which is looking monstrously overgrown. (Sound familiar?)
But I’ve long insisted that much of this investment remains export-oriented – mainly because as long as Chinese incomes on the whole remain very low, selling abroad must remain a major source of Chinese growth. For all the domestic wealth that’s been created during China’s reform decades, it’s still sorely inadequate to create big enough markets to maintain employment and boost living standards.
I’m not aware that the statistics on China’s infrastructure spending break down such investment into infrastructure-related and other categories, so to my knowledge, it’s not possible to state authoritatively that a large percentage is devoted to transportation systems that lead to ports and airports that depend heavily on the export business, and to these ports and airports themselves.
But I’m relieved to report that one of the world’s top international economists now agrees. According to Harvard University’s Kenneth Rogoff, “much” of the country’s infrastructure spending is “directed toward supporting export growth….” Not that a single economist’s views are ever dispositive. But I take some comfort in the fact that Rogoff used to be chief economist at the International Monetary Fund.
Unfortunately, one important China-related myth is apparently intact, and it’s especially harmful since it suggests that, in at least one important instance, Beijing did indeed bear out the longstanding hopes of American presidents and other strong supporters of the U.S.-China trade status quo and acted like it understood the need to sacrifice some short-term national interests for the entire world’s good.
This alleged selflessness came during the Asian financial crisis in the late-1990s. Because too many Asian countries whose growth was export-led wound up trying to sell to too few foreign markets, international investors suddenly turned very bearish on their growth prospects and starting sending their capital elsewhere. Long story short: These Asian exporters, mainly Thailand, Korea, and Indonesia, were bailed out by the International Monetary Fund – whose loan conditions mandating domestic austerity only increased their outsized reliance on exports for growth. As a result, the battering their currencies took from the flight of foreign “hot money” turned into a short-term advantage.
But one huge question hung over their heads. China of course was even more reliant on export-led growth then than it is now. Would Beijing simply stand by and watch as other Asian countries’ newly juiced exporting power ate into its own overseas sales? Or would it devalue the yuan and set off a round of (at least regional) currency wars?
The Chinese held the line – and won considerable international applause. But as a former colleague demonstrated, Beijing had in fact, pulled a fast one on the rest of the world. Although it kept the yuan steady, it greatly increased export subsidies that reduced the prices of its goods in foreign markets just as effectively. Because these subsidy increases weren’t announced with much fanfare, they were widely ignored outside China, enabling Beijing to have its cake and eat it, too.
So it was somewhat discouraging the normally perceptive Financial Times reporter James Kynge quote without comment in a recent piece the claim that China resisted the temptation to devalue some two decades ago. This point at least should have been presented with a “Yes, but…”
Nonetheless, so far October has been that rare month in which the economics establishment has added to understanding of key China-related issues on net, not subtracted from it. Granted, the sample size is not overwhelming. But when the stakes are so large, even small-scale victories should be savored.
