Ryan Herzog, Ph.D.Assistant Professor of Economics

Prepared for the Greater Gonzaga GuildFebruary 28, 2012

United States, China’s Problem

Economic Measure ValueGross Domestic Product, 2011

$11.3 trillion

Population 1.343 billionGDP per capita $8,400Growth Rate 9.2%Current Account Surplus $201.1 billionInflation Rate 4.5%Unemployment 6.1%

Economic Measure ValueGross Domestic Product, 2011

$15 trillion

Population 313 millionGDP per capita $48,100Growth Rate 1.7%Current Account Deficit $-466.8 billionInflation Rate 2.9%Unemployment 8.3%

United States and ChinaOver the last 25 years the Chinese and U.S.

economies have become interwoven. Over the foreseeable future successful growth within each economy is dependent on the other country.

China is rapidly becoming the largest export market for U.S. goods (currently 3rd behind Mexico and Canada).

US is the largest import market for Chinese goods (just ahead of Japan).

Trade IssuesChina has been accused of keeping an

artificially low exchange rate.This results in a lower price for Chinese

goods purchased by U.S. residents.

The demand for Chinese imports has resulted in China “stealing” many U.S. jobs.Over the last 25 years Chinese imports to the

U.S. have increased from $3 billion to $300 billion.

Imports from China represent nearly 20% of all U.S. imports.

What we fail to realizeOver the same 25 year period, U.S. exports

to China have increased from $3 billion to $90 billion. This number will continue to grow as China

slowly shifts into a consumption based society.

Increased demand for manufacturing jobs in China has allowed for nearly 600 million Chinese residents to come out of poverty.

China – Economic MiracleWe often overlook the human benefit to

China 1970

1980

1990

2000

2005

2010

Poverty ($2/day, % of population)

97.8%

84.6%

61.4%

36.3%

Literacy Rate (% of females above 15)

51.1%

68.1%

86.5%

90.9%

Literacy Rate (% of males above 15)

79.2%

87.0%

95.1%

96.8%

Mortality Rate, infant (per 1,000 live births)

86.6 49.8 38.3 27.3 21 15.8

Mortality Rate, under 5 (per 1,000)

123.1

65.3 48.3 33.0 24.9 18.4

Chinese Growth

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

Economic Growth of the Asian Tigers, 1961-1990China, 1990-2009

JapanHong KongSingaporeTaiwanKoreaChina

GD

P pe

r Ca

ptia

Exchange Rates and Exports

0

1

2

3

4

5

6

7

8

9

10 Exchange Rate (¥ / $)

Implied PPP Con-version Rate

Yuan

per

USD

Today the yuan remains undervalued by 30-50%

Since 2005 the yuan appreciated 30% against the USD.

China China has followed policies similar to past Asian

tigers.

China has artificially maintained an undervalued exchange rates.Resulted in low priced consumer goods for the U.S.China has purchased a lot of U.S. debt, saving the U.S.

trillions of dollars in interest payments.

China’s exchange rate is appreciating. Lowest trade surplus with the world over the last 5

years.Smallest current account surplus since 2003.

Job Losses in the U.S.

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

0

5000

10000

15000

20000

25000

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Employment in Manufacturing

Unemployment Rate (%)Employment in Manufac-turing (Millions)

Mill

ions

of

Peop

le

From 1979 – 2011 the U.S. lost 7.7 million manufacturing jobs

Job Creation in the U.S.U.S. firms would rather operate domestically.It is costly to operate abroad.

Government regulations, transportation costs, communication, political uncertainty, and negative publicity.

In order to increase domestic manufacturing employment the U.S. would need:Greater worker productivity.

Increased on-the-job training programs.More vocation training programs at the K-12 level.

Reduce labor costs (unions).In 2005, GM paid an average wage of $75/hour in unionized US

firms.Toyota paid an average wage of $48/hour in non-unionized US firms.

Manufacturing

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

0.00

200.00

400.00

600.00

800.00

1,000.00

1,200.00

1,400.00

1,600.00

1,800.00

2,000.00

Manufacturing Production in US and China, 1970-2009

ChinaUnited States

Billi

ons

of $

Job Creation in the U.S. Manufacturing jobs in China are unlikely to

return to the U.S. China has an abundance of (low-skilled) labor

and specializes in labor-intensive goods:Chinese exports to the U.S. include: electrical

machinery; apparel; toy, games, and sporting equipment; furniture; footwear; plastics; leather and travel goods.

The U.S. tends to specialize in more capital-intensive manufacturing.U.S. exports to China include: heavy machinery;

power-generating equipment; aircraft; medical equipment; and vehicles.

China’s Benefit to the U.S.In order to keep their exchange rate low, China

purchases U.S. debt. China is the largest international holder of U.S.

governmental debt.High demand for U.S. debt has allowed for record low

interest rates.

Lowers prices for many U.S. consumer goods.Imports from China have saved U.S. consumers more than

$600 billion from 2000-2009.

Job creation in trade sectors.Around the world, trade with China has created more than

14 million jobs (only 590,000 in the U.S.).

U.S. DebtTotal Debt = $15.3 trillion.

$10.5 trillion in public holdings.$4.7 trillion in international holdings.

$4.8 trillion in intra-governmental holdings.$2.7 trillion in the Social Security Trust Fund.$1.0 trillion in the Civil Service and Retirement and

Disabilities Fund.

International Holders of U.S. Debt

In a speech last year, Ben Bernanke stated that he believes China is holding more than $2 trillion in U.S. debt.

Country Amount ($ billions)China $1,100.7Japan $1,042.4United Kingdom $ 414.8Oil Exporters $ 233.5Brazil $ 206.9Caribbean Banking Centers

$ 174.8

Should we be worried?Yes, here is why:

Foreign money is not a stable source of funding. Foreign investors tend to seek out highest return and have little obligation to keep money in a particular country.

Members of China’s government have stated their intention to slowly reduce their holdings of U.S. debt.

Public holding of U.S. debt is expected to increase by another $5 trillion by 2020.

Who is going to lend us the money and at what interest rate?

Are we as bad as Greece?No, in terms of fiscal stability, we care

about public holdings of debt (in terms of GDP):Country Public Debt (% of

GDP)Debt held Abroad (% of GDP)

United States

68.9% 30%

Japan 200.5% 15%Greece 135.2% 90%Italy 120.0% 50%France 87.4% 50%

In the FutureIn the short run:

China needs the U.S. to continue buying their stuff.

The U.S. needs China to continue buying our debt.

In the long run:China will shift into a more consumer-focused

economy.The U.S. will need to shift into a fiscally

responsible country.

In the mean time:China will keep threatening to stop buying

U.S. debt.U.S. will keep threatening to put up trade

barriers.

China and Washington StateIn 2010, Washington State exported $10.2

billion of goods to China. 2nd among all states (behind California $12.5

billion).

This amounts to approximately $2,000 per resident.

China is Washington State’s largest export market.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

19012929

39233269

2784

42885282

73118310

9113

10300

Washington Exports to China ($ millions)

China and Washington State

China and Washington StateWashington’s Top Export Markets, 20101. China $10.3 billion2. Canada $6.9 billion3. Japan $6.1 billion4. South Korea $2.7 billion5. Indonesia $2.0 billion

Washington’s Top Exports to China, 20101. Crop Production $4.0 billion2. Transportation Equipment

$3.9 billion

3. Waste & Scrap $378 million4. Computers & Electronics $362 million5. Forestry Products $297 million