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NEWS & EVENTS:


Some US-China Economic and Trade Facts

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 Key Points • The US remains well ahead of the People’s Republic of China across a range of important economic indicators, from domestic wealth to share of global foreign direct investment. Because China is rapidly aging, most of the gaps are unlikely to close, contrary to conventional wisdom. Policymakers should not worry that China can be the global economic leader. • Instead, the focus should be on harmful Chinese behavior. While intellectual property coercion deserves attention, subsidies are the worst economic action. In particular, state-owned enterprises are often granted monopoly power and always protected from competition, denying everyone else opportunities in China and around the world. • The first step the US should take is boring: documenting the problems. But this will justify the harsh retaliation necessary for any change in Beijing. Retaliation should include closing a few industries to China the way subsidies close many Chinese industries and treating large-scale beneficiaries of intellectual property coercion as criminal entities. The United States has created as much wealth as the second-, third-, and fourth-wealthiest countries in the world combined. It is a cliché to say that getting our own house in order should always be the top priority, but it is also right. The People’s Republic of China (PRC) is an economic predator, and stronger American responses, even closing certain sectors to China entirely, are overdue. These responses must be based on sound information, such as exactly how and where Chinese state ownership makes it impossible for Americans to compete. Not only is the US the world’s dominant economy, but it can be indefinitely. The US vs. the PRC How to fix our own house is complicated, controversial, and the topic for a book or two. Why to fix our own house can be shown partly by comparing America to China. The effects of the COVID-19 pandemic will be hard to evaluate for years, but the picture at the end of 2019 was clear. From 2000 through 2019, the PRC made enormous economic progress, but that progress slowed. Even using Chinese government data—known to be manipulated1 —growth in gross domestic product (GDP) was 8.5 percent in 2000, hit 14.2 percent in 2007, then fell steadily to 6.1 percent in 2019.2 AMERICAN ENTERPRISE INSTITUTE 2 Beijing admits further declines are coming.3 The PRC is indebted, is aging rapidly, and has natural resources strained by a huge population. The best case is Chinese growth slows to a pace the US has recently achieved, but in a society much poorer than ours.4 More likely, the coming demographic sledgehammer will combine with a debt anvil to push China down Japan’s path—trivial growth for at least a generation, at a lower income level.5 The US may resign from global economic leadership, but the PRC replacing us is nonsense. Numbers speak louder than words. Using sources relying on official PRC data, and therefore spun in China’s favor, America’s advantages are stark. (See Table 1.) In 2000, the American lead in national wealth was estimated at close to $38 trillion. In mid-2019, the same estimation put the gap at $42 trillion. The average American had almost $26,000 more than the average Chinese citizen in annual income in 2000 and almost $46,000 more in 2019. This stems from US workers being $94,000 more productive annually in 2000 and $98,000 more productive in 2019. China’s results as a proportion of America’s have risen or even soared, which is often misinterpreted. Ratios cannot buy things; prosperity for individuals is a function of how much money they have.20 The same is true for what national wealth can accomplish. The raw amount is what funds programs or purchases aircraft, say. Related, confidence in a country’s currency is primarily determined by the wealth behind it. After two decades of the PRC’s rise, the yuan is still short of 2 percent of global reserve holdings, while the dollar is steady above 50 percent. The world talks about how impressive China is, but it wants dollars. An obvious response is China will close these gaps. Probably not. In 2000, its debt burden was far lighter than ours. In 2019, it was comparable. In 2000, the PRC had a considerably younger population than the US did, but in 2019, median Table 1. US vs. China in the 21st Century US 2000 China 2000 US 2018 China 2018 US 2019 China 2019 GDP6 $10.25 trillion $1.29 trillion $20.58 trillion $13.90 trillion $21.43 trillion $14.34 trillion GDP, PPP—Adjusted7 $10.25 trillion $3.69 trillion $20.58 trillion $21.42 trillion Net Private Wealth8 $42.3 trillion $4.7 trillion $102.1 trillion (midyear) $61.9 trillion (midyear) $106.0 trillion (midyear) $63.8 trillion (midyear) Disposable Income per Capita $26,6219 $76010 $48,222 $4,258 $50,310 $4,462 Labor Productivity11 $100,620 $6,131 $126,424 $28,309 $128,768 $30,143 Median Age12 35.2 30.0 38.2 37.7 38.2 38.1 Debt/GDP13 1.86 1.32 2.49 2.50 2.54 2.59 Share of Global Forex Reserves14 56% — 58% 1.8% 57% 1.8% Share of Global Outward FDI15 36.4% 0.4% 20.5% 6.3% 22.3% 6.1% Share of Global Trade16 (Goods and Services) 19.9% 3.3% 11.4% 10.6% 11.3% 10.7% Outside Citations Ratio (Inverses)17 29.9 0.03 2.01 0.50 1.82 0.55 Research and Development Spending (% GDP)18 2.1% ($215 billion) 0.9% ($12 billion) 2.8% ($576 billion) 2.1% ($292 billion) Carbon Emissions19 5.92 billion tons 3.71 billion tons 5.25 billion tons 11.18 billion tons Source: See endnotes. AMERICAN ENTERPRISE INSTITUTE 3 age was essentially the same. While debt accumulation is a choice, the One-Child Policy, lack of immigration, and other failings mean the PRC will unavoidably be much older than the US in 2040.21 In 2000, the research and development spending gap was $200 billion; in 2018, it was $280 billion (latest data that use comparable methods). Less important but the subject of much discussion: China’s global share of outward foreign direct investment (FDI) seems to have peaked in 2016 or 2017, well below America’s. China cannot buy the world, as some feared, because the trade surpluses Beijing used to finance an FDI explosion are gone.22 The other response is to stress GDP, where China does better. GDP is not “the economy”; it is an activity measure. When nearly all activity is productive, GDP is a valuable indicator of economic health. But when there are many filler transactions, it is not. China’s 2019 GDP per capita was more than double its own reports of disposable income.23 This is because Chinese GDP contains a great deal of government-driven activity that never benefits people. China’s GDP per capita is partly empty because its GDP is partly empty. The reason to respond forcefully is not that China will surpass us; it is that China is an economic predator. Chinese GDP adjusted for purchasing power parity (PPP)—in which China is supposedly leading the world—is worse. Adjusting for prices, as PPP does, is sensible, but the practice is horribly flawed. For PPP to hold, there must be arbitrage pressure causing global prices to converge.24 This requires liberalized markets, but the PRC’s capital market is deliberately closed. When tested, PPP does not hold for China.25 PPP should be used to compare consumer buying power in one small area to another, with markets open between the two. It should not be used to generate a single price level for the entire Chinese economy compared to the entire American economy, with that adjustment then applied to Chinese investment and government purchases, in which markets are not open and PPP does not work. PPP showing China matching the US is fraudulent. Predatory China The reason to respond forcefully is not that China will surpass us; it is that China is an economic predator. The PRC’s best performance since 2000 is in trade, and it is first in global goods trade. This is due partly to competitiveness but also partly to cheating, cheating the US has talked about for decades but (still) never seriously responded to. One reason for this is overemphasizing currency manipulation and, related, the bilateral trade deficit. Beijing manipulates the yuan, intervening to steady it against the dollar. For devaluation, Beijing would sell yuan to put more in circulation, buying up dollars and other foreign exchange. Yet China’s foreign-exchange reserves dropped from 2014 to 2017, before seeming to stabilize in the past three years.26 While the PRC’s official statistics are a mess, six years with no sign of rising reserves argues against the yuan being artificially cheap. The bilateral trade deficit puts more money in Beijing’s hands. It matters. But it rarely costs American jobs. From 2000 to 2019, PRC reserves rose $3 trillion. The cumulative American trade deficit with China over this period was $4.8 trillion; it was our money.27 In 2009 and the first half of 2020, the bilateral deficit fell, but jobs vanished because our economy shrank. In 2019, the bilateral deficit fell sharply, and jobs growth slowed. Most of the time, though, American demand for Chinese products rose because the economy grew and jobs were added. (See Figure 1.) From 2000 to 2019, the correlation between the bilateral deficit and US employment was positive. An important exception is manufacturing jobs in the early 2000s. The bilateral deficit is correlated with lost manufacturing jobs from 2000 through 2019, but the correlation greatly weakens when the first few years are excluded. That was when the US granted China permanent normal trading status, effectively accepting Beijing’s practices of mass subsidies and coercive acquisition of intellectual property (IP), including theft. It is those practices, not the deficit itself, that harm Americans. The practices stem from core principles of the PRC’s development model: state control of AMERICAN ENTERPRISE INSTITUTE 4 strategic sectors and technology upgrade by any means.28 State ownership is ensured by legal mandate and supported by financial subsidies. In many sectors—aviation, banking, coal, and so on— state-owned enterprises (SOEs) are guaranteed a regional monopoly or a predominant position.29 Elsewhere, they are “only” guaranteed never to fail due to commercial competition. The biggest financial subsidy is borrowing with no need to repay. China estimated SOE debt accumulation at $20.4 trillion at the end of 2018, rising almost 14 percent that year. The Organisation of Economic Co-operation and Development put SOE debt at $16.7 trillion in mid-2018.30 Chinese growth has slowed, yet SOEs borrow more on a net basis. Similar to a government, they are never accountable for their debt. The bulk of it should be considered outright grants, many trillions over time. While SOEs are barely involved in China’s top exports to the US, the inability to compete with SOEs blocks American exports. The PRC’s share of global imports trails its shares of global GDP and global exports. Further, the PRC’s imports from the US underperform their imports from other partners.31 Comparative advantage explains part of this. But part is explained by China wanting to produce what America produces, by making it illegal to outcompete First Automobile Works nationally or compete at all with Sinopec in south China. The protection and subsidization of SOEs are also advantages in third countries, with the Fortune 500 suggesting global scope. In the 2000 edition, there were nearly 200 American firms and fewer than 10 Chinese firms. The 2020 tally is almost even at 120 each. Chinese government media number private firms at 19 of these. A label of “non-state” or mixed ownership would raise that, but the 2020 group is at least 70 percent SOEs32 because they are guaranteed monopolies, cannot fail, or can borrow forever. It is $6.5 trillion of global revenue American companies cannot genuinely compete for. Given the national security implications of technology loss, coercive technology acquisition has received more attention than subsidies. Considering economics only, technology theft is not as important. Chinese subsidies apply everywhere, not just in IP-intensive industries, and in fact are Figure 1. Trade and Employment Source: US Department of Commerce, Bureau of Economic Analysis, “International Trade in Goods and Services,” July 2020, https://www.bea. gov/data/intl-trade-investment/international-trade-goods-and-services; and US Department of Labor, Bureau of Labor Statistics, “Current Employment Statistics—CES (National),” https://www.bls.gov/ces/data/. AMERICAN ENTERPRISE INSTITUTE 5 used to hike production and drive out competitors after China acquires their IP. The PRC obviously does not document forcible acquisition of foreign technology, but we can get a rough sense of how it affects the US. The most comprehensive assessment was by the Commission on the Theft of American Intellectual Property (IP Commission) in 2017, giving a range of $225–$600 billion in annual American losses from all foreign activity. China was clearly the biggest offender, but there was no single figure for China.33 This and the huge range show the difficulty of estimating IP losses. What should the US be willing to do? The first step is simple and yet still unsettled: Focus on the worst problems. Sales of US technology companies in the PRC provide another angle. In 2018, majority Americanowned affiliates in the computer and information industries had $100 billion in Chinese sales. Firms such as Qualcomm, Micron, and Texas Instruments receive more than two-fifths of their revenue from China,34 undermining claims they can resist technology transfer. Of course, IP is not limited to advanced technology. Total sales by American companies in the PRC were $390 billion in 2018, encouraging a blind eye to IP losses. Still, few US firms would do business with the PRC if it accounted for most of the $600 billion in annual losses. The annual China figure is more likely in the high tens of billions. However, in contrast to the trade deficit, it is pure loss. The trade deficit sees hundreds of billions in American money exchanged for products. Tens of billions in IP losses are revenue taken from American firms, much ending up at Chinese competitors. Finally, tariffs from the Trump administration do not help with IP, though that was the announced justification.35 The tariffs do not single out firms that benefit from IP coercion, leaving no reason for behavior to change. The administration calls tariffs an IP success because the phase 1 trade agreement addresses coercion.36 Previous administrations made such deals, of course. They never work, because acquiring foreign technology remains vital to Beijing’s development model and is worth far more than threats of future action the US has never been willing to take. Best Responses What should the US be willing to do? The first step is simple and yet still unsettled: Focus on the worst problems. The bilateral trade deficit and Beijing’s currency manipulation are not the worst problems. The US should not want balanced trade; we should want open trade. American exports are not permitted to compete with SOEs, regardless of the exchange rate. American comparative advantage is in agriculture and innovation. China buys our farm products but steals our innovation, ultimately turning what should be US exports into PRC exports. The second step is time-consuming, so no administration has ever done it properly. The pervasiveness of SOEs, the drop in competition when SOEs are present, and the absence of any trend to limit SOEs should be documented in detail. Subsidies’ extent and trends should be documented. The IP Commission’s loss estimates should be updated with specific breakdowns by country. The US Department of Justice (DOJ) has greatly expanded its China IP investigations,37 which will make estimating the cost of theft easier. All results should be compared to other major trade partners. This will show how extreme Chinese behavior is and demonstrate that the problem is not trade but trade with the PRC and any countries like it. The third step is enforcing our laws. The DOJ has dozens of Chinese economic espionage cases on file, with the pace accelerating recently.38 Some past cases have proved extremely destructive.39 Others could prove extremely destructive in the future.40 The US Department of Commerce’s Entity List—frequently used by the Trump administration—merely requires an extra license application to sell to borderline-criminal entities, which is ridiculous. Firms benefiting from theft on a large scale should be banned from all business with Americans and American companies. If criminal behavior continues, global financial sanctions should be imposed. AMERICAN ENTERPRISE INSTITUTE 6 Because the US has not comprehensively measured Chinese subsidies, including suppressing competition, we have not fully applied antidumping duties to China-made products. This is a superior alternative to across-theboard tariffs, which do not retaliate against specific Chinese actions and are therefore in some cases too low. For instance, antidumping duties can be many times higher than 25 percent.41 Other steps move beyond enforcing laws but fit decades of American policy principles. The World Trade Organization wrongly treats most subsidies as acceptable if they do not support exports. Subsidies that inhibit imports have similar effects. After documenting subsidies, the US can invoke the reciprocity principle to close some markets to China (and any others with similar practices). The US should not simply mirror the sectors China protects, and we should not join the subsidies race. Instead, we should punish and discourage subsidies. This will also be much cheaper. Coerced IP transfer in China is even harder to evaluate than IP theft, making the best retaliation hard to determine. But the US definitely should not be helping Chinese firms benefiting from anticompetitive practices or using coerced or stolen IP. This implies investment from America into China needs some sort of review or restriction. There is none right now, and the issue deserves more attention. At best, US portfolio investment in China set a record in June 2020 at $246 billion, from $104 billion at the end of 2016. At worst, most American investment in the Cayman Islands ends up in Chinese enterprises, and the true total could approach $800 billion.42 Our money should not boost bad economic actors (or support human rights violations or assist the People’s Liberation Army). A warning: The debate about friends’ and allies’ role in US policy is potentially harmful. It is certainly wrong to treat them as anything like China.43 But coordinating with friends and allies must be a complement to US action, not an alternative. Only an America unmistakably willing to act can convince others to take the risk of challenging China, and even that may not be enough.44 If coordination becomes the top priority, nothing may get done at all. In response to all this, Beijing will first bluster, then try to manipulate the US politically, and finally act. Sales by American companies in the PRC show there can be serious costs to confronting Chinese predation, frightening the business community. Other costs, however, are imaginary. Debt is our greatest long-term challenge, worsening by the day. The PRC stopped buying our debt on a net basis in 2014, however, and its role in financing US borrowing has been dropping for more than a decade.45 We did not need China for cheap goods in 2000, and we would not want to rely on it for anything important in a crisis in 2025, whether another pandemic or an attack on Taiwan. What happens in the US matters most, and we should not warp America in response to China. It is not a peer. The US should take the time and effort to demonstrate how much Chinese practices harm Americans and others, then muster the political will to retaliate effectively. Otherwise these concerns—state subsidies, IP theft, and noneconomic issues—will only worsen. Figure 2. Policy Summary Source: Author frustration. AMERICAN ENTERPRISE INSTITUTE 7 About the Author Derek Scissors is a resident scholar at the American Enterprise Institute, where he focuses on the Chinese and Indian economies and on US economic relations with Asia