With the WTO agreement signed into effect by the Clinton administration, it made it that much easier for US companies to access China’s cheap labor. Review this article to understand what was happening in 2000 and the opinions of the US International Trade Commission.
Allowing free trade with China, they said, would be devastating to the US economy because they would do what Mexico did after NAFTA, and that was devalue their currency. This would make Chinese goods very cheap and Americans would lose even more manufacturing jobs. While many people are concerned that the Chinese have taken US manufacturing jobs, this was largely inevitable. With technology improvements coming at break neck speeds coupled with globalization, it was only a matter of time before industry shifted to economies such as China, Mexico, and many other developing economies.
There are many benefits to globalization and many of the developing nations are now seeing better working and living conditions. There are setbacks as well, as recently witnessed with food quality problems in China and Mexico. Which reminds me to point out that in its infancy, the US had much greater problems during the American Industrial Revolution than many of the developing nations of today. There were production problems, infant workers, poor health care, lack of education, slave labor and on and on. On the flip side, there was an increase in productivity which led to workers earning more money. This afforded them the ability to invest and also buy better things for their children and themselves. The education system was also developed.
A Shift to Service
The US has undergone a drastic economic shift. We have shed thousands of manufacturing jobs. We are now a service economy, and we are seeing things that have not been seen before. In the past, an inflation scare like we’re seeing now would likely lead to job cutbacks and lower spending because we manufactured our own products within this country. We will see this a little, but not as in the past. It could be that we are becoming a very mature economy, and with the aid of lightning fast communication via the internet, we are seeing the benefits of our new age economy. Computers have given rise to super efficiency and will continue to do so. The children of today will have wonderful devices at their disposal to engage with the world and learn and create new and medicines and technologies. Quality of life will improve around the globe. Much of this is made possible by our relationship with China, with whom we have a massive trade debt. While many see this as bad, as long as it is managed, it should be viewed as a positive.
A Symbiotic Relationship
In America, we buy cheap goods from China at a much cheaper price than they could ever have been made here. There is a very large labor market in China. Greater supply of labor means lower costs. In America, in a slow down, we may consume less manufactured goods, but we also have greater job stability because of the service economy we are a part of. It is China who will be effected in a more drastic and direct way. Their economy is very dependent on the US consumer. A slow down in US consumer spending would have a negative effect on their entire economy.
It would also have an effect on ours. The US deficit is quite large and unfortunately, China owns a lot of our debt. We need other countries to buy our debt so we can pay back the debt that is currently due. If China goes into a recession, someone will need to buy our debt. In order to create demand, we’ll have to raise rates on the yield. This can cause inflation and all sorts of problems. In order to control this, the fed raises rates to encourage savings and reduction in spending. In biological terms, we have developed a symbiotic relationship with China.
On Wikipedia, a symbiotic relationship is defined as follows: “The living together in permanent or prolonged close association of members of usually two different species, with beneficial or deleterious consequences for at least one of the parties.” Notice that it says beneficial or deleterious. Symbiosis can be broken down further into these classes: mutualism, commensalism, parasitism, and amensalism.
A Mutual Relationship
It is essential that both the US and China work together so that both parties benefit. This will be done through government collaboration and further acceptance of China to allow their currency to gradually rise in relation to the dollar. I think that China is doing this but many policy makers in Washington want the Chinese dollar to float. I feel this would create a very unstable environment. I think the bureaucrats want it to happen so they can have greater control over China and so their multi-national sponsors (we all know politicians are corporate sponsored now) can gain access to the huge Chinese markets more rapidly. They would be able to do this, because if the Chinese dollar were allowed to float it would adjust and strengthen versus the dollar, which would make US goods much cheaper to the Chinese consumer. It would also fluctuate and the Chinese government would lose control (I have to wonder why Washington thinks this is any different than what the fed does with interest rates). As the Chinese dollar gradual strengthens versus the dollar, there will come a time when allowing it to float freely would be wise.
I don’t feel we’re there yet. It would probably be beneficial for them to revalue it on a more regular basis to control GDP growth, but it’s more a trial and error process with a lot of modeling. I’m sure the Chinese have some extremely intelligent financial wizards working on this as we speak, as does the US. The relationship between China and the US right now is creating a very stable climate in the US and is also allowing China to build out its infrastructure and become a manufacturing powerhouse. Maintaining a mutually beneficial relationship is very important for the survival of the entire world economy.
One Last Thing
You may be asking, who will take over manufacturing once China becomes a stable economy, and I have one word for you. Robots.