How Bad Is China Really?

Thursday, 02 March 2006 09:24:54 (GMT+3)   |  
       

For quite some time now, China has served as the convenient scapegoat for any economic malaise in the US. The common belief is that China is simply shipping too many goods to the US and does not import enough from the US, taking away American jobs in the process.

All of this is accomplished by artificially keeping the currency undervalued. Public sentiment, at times, approaches hysteria and politicians are playing right into these public perceptions. 

Some US Congressmen are trying to introduce and pass legislation that would levy a 27 percent, across the board penalty against Chinese imports unless Beijing substantially devalues its currency. It will most likely never come to this, but how bad an international trading partner is China really?

During a recent presentation at the American Wire Producers Association spring meeting in Las Vegas, Nick Lardy of the Institute for International Economics expanded on some of the key economic data and performances of China. Some of his numbers are incorporated in the following snapshot of the Chinese economic development. 

GDP: Its growth in 2005 was probably close to 10% and a similar number is expected this year 

Current Account Balance: + $150 billion in 2005 estimate, or about 6% of GDP 

Trade Balance: + $102 billion in 2005, + $208 billion with US (almost 28% of the total US trade deficit)

(On the surface it looks as if the US is financing the Chinese imports . . .) 

China's Average Import Tariff Rate: From 55% in 1982, the average tariff rate went down to 10% in 2005. This is on par with Turkey and slightly lower than Argentina and Brazil (12% each); Mexico's average tariff rate is 17% and India's close to 29% 

China's Import Tariff Revenues as a Percentage of the Value of Imports: 3%, compared to India 18%, Turkey 1.9%, and Mexico 1.8% (all numbers as of 2004) 

Import Ratio Compared to GDP: 30% (this is high even for an Emerging Market), India  20%, US 17%,and Japan 9% 

Share of Manufactured Goods Produced by Foreign Companies: 32%, US 17%, EU 25%, Japan 1% (one!) 

Openness of Chinese Economy: Sales of imported goods and goods produced by foreign companies accounted for 50% of China's GDP in 2003, the latest available number 

China is a very open and competitive market in many ways. Their market is more accessible than many other fellow Emerging Markets, and more accessible than Japan ever was in their economic development. The undervalued currency is the driving factor of the Chinese exports.

But let's not forget that Germany's currency (the Deutsch Mark, introduced in 1948) was grossly undervalued for at least sixteen years before the floating exchange rates came into effect. Germany turned in a wealthy country, buying US goods and lending a sense of security to all of Europe.  

Eventually, China will have to let its currency either float freely or in a broader range or else imports will become too expensive. And before US legislators resort to any penalties for Chinese goods, let's remember that many economists estimate that the Consumer Price Index (CPI) in the US would be two percentage points higher if it weren't for imports of Chinese consumer goods.

 


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