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China's rise has been win-win, not zero-sum

By Colin Speakman | | Updated: 2019-12-03 15:37

An early claim of the current US Administration was that China has been taking advantage of the US for many decades and previous presidents have failed to tackle it. President Donald Trump even said he did not blame China for it. It is true that the initial stages of China's rise benefited from imports by the US and other Western economies, since domestic incomes were low.

However, when Deng Xiaoping telegraphed CEOs of western multinationals to come invest in China in 1979, it was so those MNCs could take advantage of low wages, increase profits and supply the US and others with affordable products which have improved American lifestyles and kept inflation in consumer goods industries low or negative.

After China joined the WTO in late 2001, it became even clearer China was a "land of opportunity" for US business. In 2004 the prestigious Harvard Business Review devoted a whole edition to "Doing Business in China" and I thought I'd quote a little from the copy I still have in my office. "For at least the next 10 years, multinationals should be the biggest winners in China," one article reads. "As China's economy grows and opens further, the opportunity it presents to multinationals is changing. Now foreign firms can actually go after the Chinese domestic market, and it's worth going after."

This message was reinforced by the title of James McGregor's book a year later, One Billion Customers, which discussed how foreign companies might enter and succeed in the Chinese market. Fast forward a few years and we have already seen the importance of this market for US-based coffee chain Starbucks and the American automobile industries. China has become the growth market for both industries, and saved automakers' bacon after the 2008 financial crisis thanks to ventures in China. All this is a far cry from President Trump's suggestion US multinationals draw back from investment in China and attempt to decouple from the country.

There is another way the US has taken advantage of China, and it lies in the real economy, or consumption of goods and services. An economy's standard of living for a given population depends on the output of goods and services it can produce, typically expressed as GDP, plus the balance of trade. At its peak, 35 percent of the output of hard-working Chinese producers was not enjoyed by Chinese citizens, as it was exported. The significant trade surplus China runs with the US means output is not replaced by equivalent value imports. It is US citizens that enjoy higher living standards by supplementing US GDP with a high volume of net imports from China. The US takes advantage of its status as the issuer of the world's foreign currency to fund this deficit and allow Americans to live higher on the hog. Who is taking advantage now?

Of course, the US administration's rhetoric on all this is under the banner of "Make America Great Again," with the common notion jobs will be returned to the US if tough action is taken on China. "Onshoring" is highly unlikely to happen, as a combination of rising costs in China and the impact of misguided tariffs will encourage MNCs to invest in lower-cost economies in Cambodia, Indonesia, Laos, Vietnam and other countries. Even the emerging Middle East and Africa markets may benefit.

Attempts to slow China's growth will lose US multinationals China's growth markets. MNCs are highly unlikely to bring back jobs to high wage America in an era of AI and robotics. The higher the wages, the more the incentive to replace labor with technology. The US Administration claims tariffs are hurting China, but it is far more likely they will hurt American consumers in 2020.

Smart US companies bought inventory 6 to 8 months ahead to avoid tariff impacts — hence Black Friday to Cyber Monday bargain shopping deals — but once those stocks are exhausted, and particularly if the Dec 15 tariff increases take effect, US consumers will see the reality and the unravelling of the advantages China's rise has brought.

It seems likely the US Administration is beginning to see prolonging tariff wars is like shooting itself in the foot, hence the pivot toward blocking selective cutting-edge Chinese products on the grounds of "national security" – something which is harder for US citizens to apprehend. That is partly because the US Administration has not managed to show much evidence. It is American consumers who will be most disadvantaged by all this. Hopefully common sense will prevail in 2020 and we can get back to a win-win arrangement.

Colin Speakman is an economist and an international educator with CAPA: The Global Education Network.

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