USA and China. How do they compare economically?
Firstly let’s take a quick glance at the background of the two countries.
Most of us have a reasonably informed knowledge of the last 150 years of USA history from the conclusion of its civil war in 1865 when it agreed, at least in theory, to abandon slavery, through theRoaring Twenties into the Great Depression and subsequently F.D. Roosevelt’s introduction of the New Deal.
USA manufacturing boomed during and after WW2 and since none of these hostilities nor Vietnam War took place on American mainland their economy continued to boom throughout the 20th century. The extent to which it is continuing to boom during the ﬁrst 2 decades of the 21st century is debatable and worthy of a separate essay.
Unfortunately the history most of us were taught was European centred with a sprinkling of the British Empire’s role around the world but with little Chinese content. Hence a little research was required.
While China never became a colony of any European power it was none the less almost treated like one. When Britain needed funds to ﬁnance the growing demand for tea from India it raised these funds by taking opium grown in India and aggressively selling it into China.
Eventually the Chinese decided this was not in the best interest of their people and tried to curtail the importation of the drug. This led to two Opium Wars 1839/42 and 1856/60 fought by China against Britain and France.
China not only lost both these wars but in the ensuing treaties (known as The Unequal Treaties) it lost various coastal territories and was forced to agree to commercial concessions which included the continuation of the importation of opium.
Not surprisingly the colonialist attitude of European countries towards China coupled with droughts and crop failures gave rise to much unrest ﬁnally resulting in a rebellion in 1899 led by a number of Chinese martial arts groups, which became known as the Boxer Rebellion.
The Boxers laid siege to an area of Beijing in which there were mainly foreigners and Chinese Christians. The commercial interest in China had grown to such an extent since the Opium Wars that an alliance of eight nations(America, Austro-Hungary, Britain, France, Italy, Germany, Japan and Russia) provided a force of 20,000 which not only lifted the siege but plundered the city and environs, executed suspected Boxers and government officials who may have supported them and extracted further concessions from China. Some of the conditions in the Boxer Protocol were that foreign troops were entitled to remain and China was required to compensate the eight nations for the “inconvenience” caused by paying them a total of 450 “taels” of silver, in 2018 prices about $10 Billion, over the next 39 years
Eventually the Chinese Qing dynasty was overthrown in 1911 and coincidently for the next 40 years Europe was embroiled in two World Wars and a variety of insurrections among their many colonies. This gave China a free reign to get on with its own troubled domestic affairs. In a civil war the Nationalists under Chiang Kai-shek (heavily supported by the USA) lost out to Mae Zedong and the Communist Party. This resulted in 1949 in the formation of the People´s Republic of China.
The Nationalist Government which retreated to the Chinese island of Taiwan continued to be recognised by the USA as the o cial government! It took 30 years until 1979 until they ﬁnally relented and President Jimmy Carter recognised the communist party government of the People´s Republic of China.
Fast forward to 21st century.
China’s extraordinary growth to become the 2nd largest economy in the world has been remarkable. Population-wise it is 4 times the size of America but more importantly over the last 30 years it has achieved GDP growth of between 6% and 9% compared with between 2% and 3% for the USA. It is only a matter of a couple more years until it easily becomes the world’s largest economy.
Deng Xiaoping who led China from 1978 to 1992 was committed to reforming the economy. His approach can be gauged from the famous comment he made, “it doesn’t matter if the cat is black or white as long as it catches mice”.
In order to maximise China’s advantage of having a growing abundance of cheap labour who were keen to leave the land and ﬁnd work they decided 1) to become a low cost production facility for the rest of the world and 2) to offer companies from outside opportunities to set up in China and have access to their massive home market.
The deal was just too good for US companies to pass up, they could smell the increased proﬁts which would come from access to such a huge growing market. Furthermore any mounting pressure for wages increases at home could be avoided by exporting jobs to low waged China. In reality American workers were now competing wage-wise with Chinese workers; there was ever only going to be one winner!
To somehow compensate American workers for their loss of jobs and for their zero real wage increases they would now have available cheap consumer goods from China. Walmart, Target and other companies became “Nationwide Distribution Centres” for Chinese factories.
Foreign companies were allowed, even encouraged, to set up business in China with two conditions,1) they must be in partnership with a Chinese company, be it a state entreprise, a private company or a hybrid combination of both. 2) they must share their technology. In return they had full access to a low paid willing workforce and to the Chinese domestic market.
Importantly the purchasing power of the Chinese market was growing in two ways, population growth and real wage growth, whereas in the US population growth, apart from immigrants, was minimal and more importantly real wages in USA were straight lining. While the purchasing power of US workers wages has stagnated for the last 30 years, real wages in the same period have quadrupled in China. Granted they were starting from a low base, but there’s a certain “feel good factor” when your wages increase year on year.
The current relationship between these two huge trading economies has been likened to a bad marriage without divorce as an option. While the Communist Party still rules the roost there has been a steady growth in new enterprises, some huge infrastructural projects nationally managed, others decentralised to the provinces and many small private companies. Interestingly if one considers capitalism to be a situation in which a small number of people at the top of an organisation control and make decisions regrading how it is run and managed and the large majority of the people work for a weekly wage, then there is a lot capitalist activity in China.
Back to the bad marriage analogy.
Over the years the scales have constantly tipped in favour of one party, China. Not only have they have taken millions of their people out of rural poverty, but they have acquired and developed technology and built up a massive manufacturing base.
America on the other hand have lost their once vibrant manufacturing base, poverty has not been signiﬁcantly reduced and personal debt levels have ballooned as workers on stagnating wages borrowed to cope with increasing prices.
China is investing heavily in 3rd level eduction whereas every State in the Union bar one (N Dakota) has reduced support for public universities which account for 75% of USgraduates.
It gets worse.
China’s exports to USA have been consistently greater that their imports from the US. In American speak, a very negative trade balance. The imbalance in favour of China in 2018 was $379 Billion, there has never been a balance in USA’s favour since 1987.
The elephant in this dysfunctional family’s living room corner is… What does China do with their huge annual surplus of US dollars? Simple, who needs dollars? The USA. The Communist Party’s People’s Republic of China is currently a massive lender to the USA through its purchase of US Treasuries, known in Europe as Government Bonds. As with many a bad marriage the financial imbalance makes a split between USA and China well nigh impossible.
Trumps idea that America will beneﬁt by the imposition of tariffs on Chinese imports is difficult to understand. A tariff is just another tax on an imported item. For example if an imported $10 shirt ﬀhas a 25% tari applied it will now cost the American consumer at least $2.50 more. Assuming the importer eventually imports less shirts this will hurt Chinese shirt factories, but will there be such a shortage of shirts as to cause an American company to get into shirt manufacturing? Fairly unlikely since folks who were used to buying the cheap imports are unlikely to pay the much higher cost of a locally make shirt.
The only obvious beneﬁt to the USA is that the $2.50 tariff will generate additional income for the Federal Government. As I understand it the tariffs are China speciﬁc so what about the lots of other countries who will be very happy to offer cheap $10 shirts, such as Bangladesh, Vietnam, Cambodia, India etc. etc.
The greatest boost in the 2020 presidential elections that Trump could have would be a military victory; it’s sure not going to happen in Afghanistan; and he won’t take on the Chinese whom he has strongly criticised for their build-up in the South China Sea; hopefully he won’t start a war with Iran which Saudi Arabia is encouraging him to do. So perhaps he’s hoping for a Trade War victory