A Contribution to America’s China Conversation

***I wrote this in January 2007, I think it’s more relevant than ever.***

“America’s China Conversation” is a superset of conversations that have to do with the US, over time, losing its competitive advantage and therefore wealth advantage over the rest of the world, with China the most prominent competitor. Generally, in our minds during such conversations, “they” actually might be China, The Far East in general, may or may not be including India, Eastern Europe and other developing nations. I’m sure most readers have had one of these conversations, so you know what I mean.

Here’s a summary of the China Conversation from my perspective.

China possesses a much faster growing economy than the US. China of course is already a formidable worldwide economic force, providing a great deal of the world’s labor and physical plants for manufacturing.

I thought about this and took a look at comparative GDP’s and growth rates.

In 2005, the US GDP was about $12.5 trillion. The same year, China’s was $2.25 trillion.

US GDP during the past five years or so has grown at 3.2%. China’s has been growing at 10.2%. These stats are from Google and generally sourced from the CIA Factbook.

Charting this growth, China would overtake the US in GDP by 2032, just twenty-five years from now.

India’s GDP, in 2005, was $719 billion with a growth rate of 8.4%. In 2032, it will be $6.35 trillion, still the distant third of these (and behind several other countries at that point as well), but still eyebrow-raising. By 2050, India’s GDP would be over half that of the US.

I’m not an economist, but I suspect these numbers paint a telling picture, even if things like ‘leveling off’ will take place. I’m not sure who exactly is leveling off more these days, but of the three, it seems like China and India are developing much more rapidly than the US.

I should also point out that, if and when China’s GDP surpasses the US, China will have a very long way to go before they can reach the same GDP per capita with its much larger population. But GDP per capita speaks to quality of life. I’m not sure about comparative economic power.

WEALTH, WHO HAS IT?

What do we make?

For starters, I am surprised the US is still so far ahead. I mean, what exactly is it we’re producing? Ever since I remember reading the backs of my Hot Wheels cars, I’ve taken as common knowledge that everything is made in China. (or Malaysia or Taiwan…) The fact is, our GDP is composed of almost 80% service. Service is us making each other dinner at the Sizzler; renting rooms to each other at the Holiday Inn; caring for each other at General Hospital (or watching the TV show, as the case may be).

The other 20% is where ‘real’ industry lies. You know, making tractors, making power plants and operating them. I’m not downing services. I just wonder how much of that gives us strength as a nation.

I also wonder about this: if a cheeseburger costs $1.00 at a fast food restaurant and a very similar one costs $7.00 at a restaurant, is that difference a contribution to GDP? You might say these cheeseburgers are different. OK, what about generic or branded toothpaste? Or how about drugs, where by law generics must be identical to the branded version.

Trade

America almost always runs a trade deficit. I’m not concluding this is bad either, but it seems intuitive that if you consume more than you produce, that isn’t good. But it might also be an indicator that even if you wanted to, maybe you just can’t. Translation: what happens when indulgence turns into dependence?

If the other countries are willing to indulge you for a while, and then you become increasingly dependent, and then the countries take away such indulgence, what then?

Computers!

Ah, technology. That’s where we’re the best, right? Well, I suppose, but my guess is most of the insides of my computer would be imprinted with the same “Made in China” moniker as my Hot Wheels. Or maybe Singapore or South Korea? And then there’s software. Well, lots and lots of software is produced here in the US, but what about the growth rates in software development in India and China?

Isn’t it reasonable to assume that these countries are likely to continue to become increasingly better at exporting software development? And while we’re on the topic, how much of the treasured service sector comes from things like customer service phone calls? Aren’t those calls not only just going to India but simply being exported to automation, let’s call it Internet-land? If the “Internet-land” can resolve our problems through automation, they go away. But then, doesn’t the wealth go away, too? (Or a great deal of it?)

Ownership!

Americans are the richest people in the world. We are also the most in debt. I believe in an ownership society but I also believe that, for people, net worth equals assets minus liabilities.

Our companies dominate the business landscape. But what does that mean? For most companies to be dominant in an industry, they would need to be global and they are. It’s likely they would source a lot of their production outside the US, probably locate facilities outside the US, and likely sell to customers outside the US. Even in the age of e-commerce, can’t we at least figuratively follow a transaction? If a US company sources its product from China and sells it in India, is that transaction worth anything to the US economy?

What about on the stock market? Maybe the company’s stock price was boosted because it’s revenues and profits were improved by the transaction. Would it surprise us to know that much of the stock of the company was owned by foreign investors? Would it surprise us to know that much of the stock was also owned by US banks that were also, in fact, significantly owned by foreign investors?

The Incumbent

Wealth, or more specifically, the promise of continued wealth, benefits from being in a favorable incumbent position versus others. For example, since Wall Street exists in America, and since Wall Street is the de facto center of the financial universe, it won’t be unseated. Echo the sentiment for things and places like Hollywood, Silicon Valley, the US dollar, the English language. Does this logic even deserve to be refuted or is it just obviously nonsense?

SO WHAT?

In twenty-five to fifty years, all these trends seem to suggest that the US won’t be so dominant.

We still have a vastly dominant military force, but even that begs the question of our power. Won’t funding a vastly dominant military be increasingly burdensome on the economy that must fund it, when others are less encumbered?

Conclusions?

This post isn’t so much about conclusions as perspective. Many Americans (most reading this article) grew up in a time when the US was unquestionably the dominant force on so many levels of the global playing field that that paradigm is deeply ingrained in our psyche. Moving forward, a one among many mentality seems more appropriate.

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