(USA/Cina) From China bashing to China embrace (Asian Century Institute, 15 febbraio 2013)

15.02.2013 15:59

"China bashing" was one of the major flashpoints of the recent US presidential election campaign.

Republican candidate Mitt Romney threatened to declare China a currency manipulator on the first day of his presidency, if elected. And both Obama and Romney competed with each other in denouncing China as a country that doesn't play by the rules. China was mentioned 35 times in the third presidential debate!

While the Chinese might be offended, they know full well that these are just US election games which they have to put up with every four years. It is also important for Americans to realize that the mediocrity and populism of their political discussions on China are not good advertisements for their brand of democracy.

Now that the US elections are out of the way, we can get back to serious business. In fact, we can look forward to a continued deepening of the US/China economic relationship, with China likely emerging as an important driver of US economic growth through Obama's second term.

The wave of China bashing in the US elections was not of course without substance. China does control the value of its currency, and by most measures, it is undervalued. Though this is now much less the case than in the past.

Most Western countries, not just the US, also encounter many problems doing business with China, like the lack of respect for intellectual property rights, market barriers, and non-transparent policies. And China's role as "factory of the world", specializing in the low-cost, low-skill end of the manufacturing supply chain, has put downward pressure on jobs and wages for lower-skilled workers in the US.

But China now has a very deep and mutually beneficial economic relationship with the US and other Western countries. And this relationship is set to deepen further in the coming years.

China is now America's second largest trading partner (after Canada), with trade in goods and services totaling more than $550 billion in 2012. US exports to China in 2012 were $110 billion, up 550% from 2000 and up 450% since 2001 when China entered the World Trade Organisation (WTO).

The US does have a major trade deficit with China of over $300 billion. But the value of China's exports is inflated because of the high level of their foreign sourced content. Nearly 40% of the total value of China’s electronics exports come from foreign sources, according to recent research by the OECD and the WTO. On a value added basis, the US's trade deficit with China is some 25% lower, with the US in reality having a much higher trade deficit with high-tech component producers like Japan.

One factor driving this trade deficit has been the outsourcing of lower value added manufacturing production to China and other Asian countries. Products like the i-Phone are assembled in China, and traded back to the US.

There is now growing evidence that we might be coming to the end of this outsourcing cycle, as Chinese wages climb higher, lower cost domestic US energy is improving competitiveness, and labor costs are improving in the US. While the ultimate effect of a new "insourcing" trend is yet to be seen, there does seem to be a change in the tide.

Another factor is that many US companies have decided to tackle the Chinese domestic market by investing in China, and selling directly to the Chinese consumer, rather than producing at home in the US, and exporting. As China seeks to rebalance its growth model away from export towards domestic demand, the growing number of Chinese middle class consumers will become a very important market for the US.

In fact, the sales of US companies in China far exceed their exports to China from the US. This means that America's "real trade deficit" with China is very much lower.

This may not create so many American jobs directly, although a good many Americans actually do work in China and other overseas countries for US companies. But it does benefit corporate profits, and thus share prices and dividends for America's investing citizens.

When it comes to trade in services, the US does have a small surplus with China, $13 billion in 2011. And services trade is now booming with China.

Chinese middle class tourists are now also spreading out across the world. The number of Chinese tourists visiting the US increased from 710,000 in 2007 to 1.36 million in 2011, growing by 17.6 percent annually during the period.

While there may be more American tourists going to China, over 2 million, Chinese tourists spend very much more money. They spent an average of $7,100 each while visiting the US in 2011, whereas American tourists in China only spent $2,300. Tourist industry experts predict continued strong growth in this very important business for the US.

China now also leads international student enrollments in the US, surpassing countries like Canada, India and South Korea. In 2010/11, mainland Chinese students increased 23% to more than 194,000. This brings in much needed revenues to US universities and other education institutions. It is also a very important cultural investment, with Chinese students absorbing American values and ideals.

These Chinese students are usually seeking a high quality of education that will train them to become independent, creative and critical thinkers, and they see that the world's top-ranked universities are in the United States.

The Chinese are also the largest group of Asian Americans, the fastest growing ethnic group in the US. There are now some 4 million Chinese Americans, representing 23 per cent of the Asian American population. Some 51% of Chinese Americans have a bachelors' degree, compared with only 28% for the overall US population. And the household income of Chinese Americans stands at $65,000 compared with American national average of around $50,000.

These highly qualified migrants are thus an important asset for the American economy, and their number is likely to benefit from the skilled migration policy reform currently being discussed in Washington.

Chinese investment in the US reached a new record in 2012, with deals worth more than $6.5 billion, a 12 percent increase from the previous record of $5.8 billion in 2010. Investment analysts are also expecting that Chinese investment in the United States will break another record in 2013.

True, China is still small investor relative to other parts of the world, with less than 1 percent of total foreign investments in the US. But these numbers are only expected to grow as Chinese firms are seeking access to technology and know-how, and overseas markets, to prepare for a new era of Chinese growth. Moreover, these figures are most certainly underestimated as they do not include flows through offshore financial centers.

Chinese investment in the US gave rise to some controversy in 2012 regarding the security risks associated with Chinese telecom firms Huawei and ZTE. Without seeking to downplay these risks, it is also clear that both the US and China are going through a mutual learning and confidence-building phase in this new investment relationship. As experience grows on both sides, this will lay the foundation for a stronger investment relationship in the future.

In conclusion, with the US election hysteria now out of the way, we can expect a growing, deepening and maturing of the US/China economic relationship, which will become an increasingly important driver of growth for both countries.

It is true of course that there is much more to the overall US/China relationship than just economics. There are many important issues to deal with like cyber-security, China's bellicose behavior in the East and South China Seas, China's relationship with North Korea, economic espionage and human rights, to name just a few.

But a more deeply anchored and mutually beneficial economic relationship will mean a growing co-dependency of US and Chinese destinies. One can only hope that this might improve the incentives for deeper cooperation across the full range of economic, political and strategic issues.