Introduction: Welcome – Thanks for inviting me. Talk about research Capital Mobility and why countries invest in other countriesExplaining economic growth and the impact of an aging populationMy goal of the presentation is to provide everyone with information in regards to the US/China relationship so you can better understand the political talking pointsNearly every day there is a new story about China or US Manufacturing (often linked)We often hear a lot of negatives in regards to ChinaSweatshops (Apple, Nike, Gap)Rat poison in pet food (chinaLead paint on Chinese toysArsenic in infant formula (US)Immigrant labor
The basic overview of the US-China relationshipChina produces low-skill labor intensive goodsThese goods are sold to the US, to increase US demand China has kept an artificially low exchange rateUS run an annual trade deficit of $400-600 billion per year.In order to run these deficits countries need to lend us money (a lot like buying a house/car)Typically when we buy goods from another country (and demand their currency) their currency should appreciate.To prevent the Yuan from appreciating China turns around and buys US debt. This keeps their exchange rate low and goods cheap for.
Growth Rate, CA, Inflation, Unemployment from the Economist.comGDP, Population, GDP/Capita – CIA factbook
Growth Rate, CA, Inflation, Unemployment from the Economist.comGDP, Population, GDP/Capita – CIA factbook
Emphasis the importance each country is for the other.-China needs the US to continue buying their goods -US wants to keep good relationship with China, so they continue to buy US goods today and in the future.
The overarching issue has been jobs. Has US manufacturing gone to China? And will it ever come back?Obama / Jobs story
Nearly ½ of Chinese population has been removed from poverty.
Penn world table (GDP ppp) – Income today: Japan (32,000) Korea (25,000) Taiwan (29,000) Singapore (48,000) Hong Kong (37,000)China has followed the export led growth strategies of Hong Kong, Singapore, Taiwan, Korea, and JapanLearn from the US
Be sure to explain what PPP means. How much money it takes to buy a common basket of goods and services within each country. In other words 1 dollar should buy 4 yuan which would maintain the same level of purchasing power. Instead 1 dollar buys 6.3 yuan.
The current account is a measurement of how much lending or borrowing a country is doing. China’s surplus was once 600 billion.
FREDThe manufacturing decline has been on going since 1980, the Great Recessions just magnified the problems as many manufacturing workers found temporary employment in the housing industry.
Important to stress a home bias. It is costly to operate certain capital intensive production overseas. As oil/gas prices continue to increase the transportation costs will continue to increase.
In 1980 US manufacturing produced 800 billion in goods with 20 million workers. Today we are producing nearly 2 trillion of 12 million workers. Manufacturing output increased by 150% while employment decline by 40%.
$600 billion - http://www.economist.com/blogs/freeexchange/2011/01/has_china_saved_us_consumers_600_billion_hu_jintao_claims14 Million - http://www.economist.com/blogs/freeexchange/2011/01/economic_statistics
Treasury Direct: http://www.treasurydirect.gov/govt/reports/pd/mspd/2012/opdm012012.pdfBe sure to explain the differences in the types of debt.
Debt projections CBO: http://www.cbo.gov/publication/42908The big concern comes down to interest payments on the debt. Over the last 4 years, the US debt has increased by 3-4 trillion while interest payments have stayed the same ($400 billion). It’s not reasonable to see interest payment increase to near $1 trillion per year by 2020 (20 trillion at a 5% rate). Right now interest rates in greece are near 37%, italy 6%,
See economists – world debt clockhttp://www.economist.com/blogs/dailychart/2011/09/government-debt
United States, China’s Problem Ryan Herzog, Ph.D. Assistant Professor of Economics Prepared for the Greater Gonzaga Guild February 28, 2012
United States and China Over the last 25 years the Chinese and U.S. economies have become interwoven. Over the foreseeable future successful growth within each economy is dependent on the other country. China is rapidly becoming the largest export market for U.S. goods (currently 3rd behind Mexico and Canada). US is the largest import market for Chinese goods (just ahead of Japan).
Trade Issues China has been accused of keeping an artificially low exchange rate. This results in a lower price for Chinese goods purchased by U.S. residents. The demand for Chinese imports has resulted in China “stealing” many U.S. jobs. Over the last 25 years Chinese imports to the U.S. have increased from $3 billion to $300 billion. Imports from China represent nearly 20% of all U.S. imports.
What we fail to realize Over the same 25 year period, U.S. exports to China have increased from $3 billion to $90 billion. This number will continue to grow as China slowly shifts into a consumption based society. Increased demand for manufacturing jobs in China has allowed for nearly 600 million Chinese residents to come out of poverty.
China – Economic Miracle We often overlook the human benefit to China 1970 1980 1990 2000 2005 2010Poverty ($2/day, % of population) 97.8 84.6 61.4 36.3 % % % %Literacy Rate (% of females above 51.1 68.1 86.5 90.915) % % % %Literacy Rate (% of males above 15) 79.2 87.0 95.1 96.8 % % % %Mortality Rate, infant (per 1,000 live 86.6 49.8 38.3 27.3 21 15.8births)Mortality Rate, under 5 (per 1,000) 123. 65.3 48.3 33.0 24.9 18.4 1
Chinese Growth Economic Growth of the Asian Tigers, 1961-1990 China, 1990-2009 30,000.00 25,000.00 20,000.00GDP per Captia Japan Hong Kong 15,000.00 Singapore Taiwan 10,000.00 Korea China 5,000.00 0.00 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
Exchange Rates and Exports Exchange Rate (¥ / $) 10 9 8 Since 2005 the yuan appreciated 7 30% against theYuan per USD 6 USD. 5 Implied PPP Conversion Rate 4 3 2 Today the yuan 1 remains 0 undervalued by 30- 50%
China China has followed policies similar to past Asian tigers. China has artificially maintained an undervalued exchange rates. Resulted in low priced consumer goods for the U.S. China has purchased a lot of U.S. debt, saving the U.S. trillions of dollars in interest payments. China’s exchange rate is appreciating. Lowest trade surplus with the world over the last 5 years. Smallest current account surplus since 2003.
Job Losses in the U.S. Employment in Manufacturing 25000 12.0 From 1979 – 2011 the U.S. lost 7.7 20000 10.0 million manufacturing jobsMillions of People 8.0 15000 Employment in Manufacturing 6.0 (Millions) 10000 Unemployment Rate (%) 4.0 5000 2.0 0 0.0 1968 1974 1980 1986 1992 1970 1972 1976 1978 1982 1984 1988 1990 1994 1996 1998 2000 2002 2004 2006 2008 2010
Job Creation in the U.S. U.S. firms would rather operate domestically. It is costly to operate abroad. Government regulations, transportation costs, communication, political uncertainty, and negative publicity. In order to increase domestic manufacturing employment the U.S. would need: Greater worker productivity. Increased on-the-job training programs. More vocation training programs at the K-12 level. Reduce labor costs (unions). In 2005, GM paid an average wage of $75/hour in unionized US firms. Toyota paid an average wage of $48/hour in non-unionized US firms.
Manufacturing Manufacturing Production in US and China, 1970-2009 2,000.00 1,800.00 1,600.00 1,400.00 Billions of $ 1,200.00 1,000.00 China 800.00 United States 600.00 400.00 200.00 0.00 1978 1992 1970 1972 1974 1976 1980 1982 1984 1986 1988 1990 1994 1996 1998 2000 2002 2004 2006 2008 2010
Job Creation in the U.S. Manufacturing jobs in China are unlikely to return to the U.S. China has an abundance of (low-skilled) labor and specializes in labor-intensive goods: Chinese exports to the U.S. include: electrical machinery; apparel; toy, games, and sporting equipment; furniture; footwear; plastics; leather and travel goods. The U.S. tends to specialize in more capital- intensive manufacturing. U.S. exports to China include: heavy machinery; power- generating equipment; aircraft; medical equipment; and vehicles.
China’s Benefit to the U.S. In order to keep their exchange rate low, China purchases U.S. debt. China is the largest international holder of U.S. governmental debt. High demand for U.S. debt has allowed for record low interest rates. Lowers prices for many U.S. consumer goods. Imports from China have saved U.S. consumers more than $600 billion from 2000-2009. Job creation in trade sectors. Around the world, trade with China has created more than 14 million jobs (only 590,000 in the U.S.).
U.S. Debt Total Debt = $15.3 trillion. $10.5 trillion in public holdings. $4.7 trillion in international holdings. $4.8 trillion in intra-governmental holdings. $2.7 trillion in the Social Security Trust Fund. $1.0 trillion in the Civil Service and Retirement and Disabilities Fund.
International Holders of U.S.Debt Country Amount ($ billions) China $1,100.7 Japan $1,042.4 United Kingdom $ 414.8 Oil Exporters $ 233.5 Brazil $ 206.9 Caribbean Banking Centers $ 174.8 In a speech last year, Ben Bernanke stated that he believes China is holding more than $2 trillion in U.S. debt.
Should we be worried? Yes, here is why: Foreign money is not a stable source of funding. Foreign investors tend to seek out highest return and have little obligation to keep money in a particular country. Members of China’s government have stated their intention to slowly reduce their holdings of U.S. debt. Public holding of U.S. debt is expected to increase by another $5 trillion by 2020.
Are we as bad as Greece? No, in terms of fiscal stability, we care about public holdings of debt (in terms of GDP): Country Public Debt (% of Debt held Abroad (% of GDP) GDP) United 68.9% 30% States Japan 200.5% 15% Greece 135.2% 90% Italy 120.0% 50% France 87.4% 50%
In the Future In the short run: China needs the U.S. to continue buying their stuff. The U.S. needs China to continue buying our debt. In the long run: China will shift into a more consumer-focused economy. The U.S. will need to shift into a fiscally responsible country. In the mean time: China will keep threatening to stop buying U.S.
China and Washington State In 2010, Washington State exported $10.2 billion of goods to China. 2nd among all states (behind California $12.5 billion). This amounts to approximately $2,000 per resident. China is Washington State’s largest export market.
China and Washington State Washington Exports to China ($ millions) 10300 9113 8310 7311 5282 4288 3923 3269 2929 278419012000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
China and Washington StateWashington’s Top Export Markets, 20101. China $10.3 billion2. Canada $6.9 billion3. Japan $6.1 billion4. South Korea $2.7 billion5. Indonesia $2.0 billionWashington’s Top Exports to China, 20101. Crop Production $4.0 billion2. Transportation Equipment $3.9 billion3. Waste & Scrap $378 million4. Computers& Electronics $362 million5. Forestry Products $297 million