U.S. Needs A New Vision Of China Relations

Mao’s peomIn a myth-busting opinion piece for the San Francisco Chronicle, University of Southern California international relations scholar Geoffrey Garrett slams Hillary Clinton’s recent echoing of middle-American protectionist sentiment towards China and offers three “trade secrets” as the basis for a “straight talk revolution in Washington where China is concerned.”

First, the trade deficit with China isn’t going away anytime soon, even though a stronger renminbi and America’s economic slowdown have caused U.S. exports to China to grow twice as quickly as Chinese exports to America in the past two years.

The trade deficit keeps growing because of the massive imbalance between U.S. exports and imports where China is concerned. The U.S. exports to China less than one-fifth as much as it imports from China. Even if U.S. export growth to China continues to outpace increases in imports from China, the bilateral deficit will continue to expand for years to come.

A second secret is that the bulk of Chinese exports to the United States are not really made “by China.” They are not even really “made in China.”

The Chinese economy today is, in large measure, an assembly platform for American and foreign companies to turn components designed and made elsewhere into final products, and then to export them to the rest of the world. More than 60 percent of “Chinese exports” are, in fact, the sales outside China of multinational firms operating in China.

What Apple says on the back of every iPod is true: “designed by Apple in California, assembled in China” from chips, hard drives and screens made in America, Korea and Japan. Chinese assembly adds only a tiny amount to the value of each iPod.

The iPod is not a new millennium icon because of its components. Nor does it beat the competition on price. iPods are must-have gadgets because of their elegant and simple design, a design created in Silicon Valley, with almost all the profits returning to Apple and its U.S. shareholders.

The fact that iPods are not assembled in the United States certainly costs assembly line jobs in America. But these are in the lowest tech and lowest part of the production process. Much better American jobs are created, in design, financing, marketing, logistics and distribution. This is a very positive trade-off.

The final China trade secret is that Americans have benefited from the vast quantities of dollars and Treasury bills (estimated at $750 billion) China has purchased in recent years to manage the dollar-renminbi exchange rate. China-funded credit kept U.S. interest rates low after 9/11 and the dot-com bust, fueling both consumer spending and the rapid run-up in housing prices.

For more on Clinton’s attitudes towards China’s role in the U.S. economy, see Reuters’ report last Saturday, “Clinton says China holdings threaten U.S. security.