China has the second-largest economy in the world. It is the world’s second-biggest trader. It has trillions of dollars invested around the world. China matters.
Every day we buy things made in China, though they may be made there by American or Dutch or Korean corporations. China buys a lot of our government’s debt and lately it has been buying small pieces of American companies and land. American companies can win or lose based on their strategies for doing business with China. Chinese students love our schools.
We gain much from the economic relationship. American consumers and companies chose to spend $400 billion in 2011 on goods made in China. China was the third-largest buyer of our exports, a source of strength for our economy. American companies looking for investors and American homeowners looking for buyers benefit from Chinese money coming to the U.S. Chinese tourists are visiting the U.S. in greater numbers.
The relationship also has serious problems. It’s not clear the Chinese government sees trade as a win–win—it seems to want China to always win more. Coming from a country where competition is mostly about politics, Chinese firms don’t always follow the rule of law. The U.S.–China economic relationship has many sides to it, and a few of them are a bit seedy.
Jobs Don’t Depend On China
A lot of talk about the People’s Republic of China (PRC) is a bit removed from the real world. But the big question is very real world: Does trade and investment with the PRC take jobs away from Americans? The answer is no, mostly. The Chinese government and Chinese enterprises do some things that cost American jobs. We need to deal with these things. But the idea that China is stealing millions of our jobs is wrong.
An eye-catching figure is the huge trade deficit we run with China, close to $300 billion last year. Unemployment goes up and down, the value of the currency goes up and down, but the trade deficit just seems to go up. In the past 25 years, the trade deficit has fallen only twice. The two years that it fell were 2001 (slightly) and 2009 (sharply).
Those were recession years, with 2009 being much more painful. The trade deficit is about the strength of our economy; when it’s strong, our trade deficit with the PRC rises. Protectionists call 2009 a great year because the trade deficit plunged—but no one else does.
We should also remember that we don’t track our trade deficit very accurately. For example, the way we count it, an iPad assembled in China and sold in the U.S. makes our trade deficit bigger even if some of the parts for the iPad originally came from the U.S.
Trade Cures Worse Than Disease
But suppose you’re worried about the trade deficit. In theory, the government could do a couple of things about it. We could put tariffs on Chinese goods. But tariffs are just a fancy name for sales taxes on things Americans want to buy. Why is raising taxes on Americans a good idea? Or we could allow only a certain amount of Chinese goods into the U.S. But that would be our government telling ordinary Americans that they’re not allowed to buy what they want. That would make us poorer and less free to spend our own money as we see fit.
Worse, very little of what we get from China can be called luxuries. Clothes, furniture, TVs, cell phones—making these more expensive or harder to find will hurt working Americans most.
A more popular idea is to subsidize our exports. Subsidies pick winners and losers, pure and simple. And the money for subsidies doesn’t come from thin air. The government takes that money from other companies and the American people. Why should our government decide that everyone else should pay to make one company’s exports cheaper?
It’s Not About the Money
Many Americans are concerned about the value of China’s currency. They hear arguments that China keeps its currency cheap, so its products are less expensive than they would be, and that this drives everyone else out of business. This is complicated—but a picture is worth a thousand words:
In the 1990s, China made its currency cheaper, which many people argue is bad for us. Yet in the 1990s, our unemployment rate fell. Starting in 2005, the PRC slowly pushed the value of its currency up, making its goods more expensive. Many people say this is good for us. Yet after 2005, American unemployment soared.
The explanation for this is simple: The PRC barely matters to our unemployment rate. In the 1990s, we had a healthy economy. In the 2000s, we didn’t. That’s the result of our choices, our failures, and our successes. Blaming China is like saying it’s the neighbors that make your house clean or dirty.
Where the Problems Are, and Why
Trade is about comparative advantage: people doing what they are best at. If I’m better at fighting fires and you’re better at making cars, I can protect you from fires and you can build cars for me. That way, we’re both better off. If the PRC assembles computers better, we benefit from that because it lets us buy computers at lower prices. China doesn’t hurt the U.S. by trading with us. It hurts the U.S. by undermining our comparative advantage.
The most important way China undermines our comparative advantage is by blocking American exports. The PRC reserves large parts of its market for state-owned enterprises. Beijing demands that its state-owned firms dominate domestic markets in coal, telecom, railways, and so on. These firms can’t go bankrupt. This means that American products can only do so well in the Chinese market, whether they’re better or not.
Competition creates prosperity, because it leads to better products at lower prices. When China competes in the American market, that helps our economy. When China doesn’t allow American companies to compete in China, that hurts everyone except the Chinese state-owned firms that should go out of business.
Another problem is the way China deals with intellectual property. America is the world’s leader in innovation. We have the most ideas, and we try to protect those ideas with patents, trademarks, and copyrights. These ideas are a major part of what makes many of our products appealing here and around the world. The iPad uses many of the same computer chips as a lot of other products; what’s special about it is the way it’s designed and programmed. That’s intellectual property.
The PRC is the world’s biggest thief of that kind of property. Chinese firms and individuals frequently ignore patents and other legal guarantees, or even steal trade secrets outright. By illegally taking our ideas and our technology, China undermines our biggest advantage in trade. When this occurs, trade becomes far less beneficial. This is why so many Americans see trade with China as harming our economy, and it is one of the real issues in U.S.–China trade that our government should be working on.
Chinese Investment Not That Important
Americans are also concerned about Chinese investment in the U.S. The Chinese buy U.S. government bonds, real estate, and American companies. Are the Chinese buying America? Can they use their holdings as leverage? No, they can’t.
The amount of money the Chinese are investing in our companies is tiny compared to the size of our economy. The Heritage Foundation follows this kind of Chinese investment all over the world in the China Global Investment Tracker. At the end of 2011, China had $30 billion invested in the U.S., much less than one percent of the $15 trillion American economy.
The Chinese do buy a lot of U.S. government bonds. The PRC may hold about 10 percent of the U.S. national debt, though their share has been falling. Unfortunately, this is because our debt has grown so much that Chinese purchases can’t keep up. If we don’t like China owning so much of our national debt, the answer is simple: We shouldn’t run such big deficits. Then we wouldn’t need to sell our debt to China or to anyone else.
Some people worry that China can sell off our Treasury bonds and hurt our economy. They can’t. All sellers need buyers. If Beijing sells and there is strong demand, China will simply be replaced by other buyers. If Beijing can’t find a buyer, it will have to cut the price it’s asking for. Then the U.S. government would be able to buy back its own bonds for less money than they are worth. That would cut America’s debt at China’s expense.
So Chinese purchases of federal debt don’t hurt us. Unfortunately, these purchases don’t help us much either. By buying our bonds, the PRC makes it easier for the U.S. to run large budget deficits, which damages the private sector and reduces long-term economic growth. That isn’t China’s fault, it’s ours.
There’s your bottom line. We need to get our own house in order. If we do, we can much more easily cope with the genuine problems that we have with China. If we don’t, we’ll hurt ourselves far more than the Chinese ever could. The American future doesn’t rest with China. It rests where it always has: with us.