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The
China Price
Brian
Trumbore
President/Editor, StocksandNews.com
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.
-------
--"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 next week, assuming my Internet connections
work down there.
Brian
Trumbore
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