Just recently both Presidential candidates have taken a “tough-stance” on China hoping to parlay the long running love-hate relationship between the U.S. and China into votes come election time. While American’s love cheap products – the sustained levels of high unemployment, combined with stagnant wage growth, has led to a rising hatred of the outsourcing of manufacturing jobs to the China. But the relationship between the U.S. and China goes deeper than just how America exports inflation to China and there are two main reasons why harsh words towards China, by the current political candidates, are no more than that.
1) Exports As % Of GDP
The U.S. is no longer an island unto its own. In the past the U.S. was the powerhouse engine that dragged the rest of the world with it – but today, more than ever, the U.S. is now a cog in the global engine. This is no more evident than when you look at the rise of exports as a percentage of GDP. In 2003 exports as a percentage of GDP was just a little more than 9% which is about the same as it was in 1999. Today, exports make up more than 13% of GDP as demand for cheaper products has surged while the average net worth of individuals has declined.
When looking at the trade data with China directly the dependency of the U.S. on China becomes even more apparent. In 1985 the U.S. imported a little more than $285 million of goods while it exported $319 million. This led to an import/export ratio of .91 meaning that we imported .91 of each dollar that was exported. Today, the U.S. imports in excess of $37 billion of goods from China while exporting just over $8.5 billion with the imbalance shifting to China as the import/export ratio stands at a whopping 4.43.
At $4 of imports for every $1 worth of exports – the dependency on China for the reduction of inflationary pressures on products has become a critical component of U.S. companies battling to increase profitability. For the U.S. consumer, who has seen wages stagnant or falling over the past decade, the need for cheaper products is critical to maintaining their standard of living. A country, like China, where the cost of labor and production is exceedingly cheap, has become the foundation of American consumerism. While Presidential candidates may complain about trade practices – it will be a different story from the voter during the next election if the next iPhone costs $2000 due to higher manufacturing costs.
2) Mutually Beneficial
It is no secret that the U.S. is living far beyond its means. The current liabilities of Social Security, Medicare and Medicaid consume almost every dollar of revenue generated from taxes leaving the balance of committed spending coming from issuance of new debt. That is where China comes in. China, along with Japan, have been the primary buyers of US Debt in recent years with China now consuming 7.25% of the total issuance of Federal Government debt, Japan is close behind with 7.05%, as of the 2nd quarter of this year.
However this is not a one way street. China is not buying our debt simply because we want them to – they have to. As discussed, each year China sells to the U.S. far more in goods and services than we sell back to them. This is not by accident – the Chinese government has deliberately managed their economy so that this trade surplus will be maintained. As the U.S. buys goods from China the revenue received is converted into China’s currency. Due to the trade surplus the imbalance of foreign currency coming into the Chinese economy would normally cause their currency to strengthen. If left alone the currency market would adjust the relative values of both countries’ currencies until the total value of imports equals exports. This would be a huge disadvantage to China.
In order to keep this from happening China must buy U.S. Treasuries to soak up the excess dollars. So, while there are many concerns that China is “owning” the U.S. through the purchase of our debt – the reality is that their purchases are advantageous for both countries. By keeping currency values stable it allows the U.S. to continue to export to China the goods and services they need in order to import lower cost products back to the U.S. consumer.
While politicians “point fingers” of blame and decry the exportation of “jobs” to China – the reality is that balance of trade between China and the U.S. is beneficial for both countries. For the U.S. we export inflation by reducing costs of production and importing back cheaper goods. While jobs are lost to China in return for cheaper labor – the U.S. consumer benefits by having a higher standard of living at a lower cost. (Name one other country where the poor have an iPad and a flat screen television.)
For China the relationship has led to a booming Chinese economy over the last decade. So, while politicians deliver “tough talk” to score points with voters during the election season – the reality is that neither country is about to do anything to change it. We need China to buy our debt to fund our excess spending, lower the costs of production to increase profitability and give consumers access to cheaper products. China needs the U.S. to sell their products to – China is still an export based economy needing the U.S. to thrive.
The love-hate relationship with China is set to continue for now. We will hate them because we lose manufacturing jobs to lower costs of labor. We love them for the cheap products that we all get to enjoy. The reality is that we need them as much as they need us – and while politicians may “talk tough” on China – they do so with their fingers crossed behind their back.
Images: Flickr (licence attribution)
About The Author
Lance Roberts – Host of Streettalk Live
After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.
Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.
Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.