The Economics of Globalization
What is happening today in the U.S.-China relationship and in the intertwined economies of both countries has to be understood against a backdrop of globalization, arguably the single biggest defining feature of the last 20 years. These features all have an impact on jobs, labor, work and consumption that will be addressed in the following pages.
Some Features of Globalization
Moveable Capital: The ease of shifting capital between countries is unparalleled. In the U.S. and elsewhere, profit-maximizing corporations are able to move their financial investments around the globe to find the cheapest labor—whether in China, Southeast Asia, the Middle East, and Central and Latin America. This often means fewer jobs for American workers, and more jobs, at a vastly reduced pay rate, for foreign workers.
Flexibility of Production: Today, it is almost impossible to clearly uncover where a manufactured product is made in the global market. A product can be invented and designed in one country, and then assembled in another with component parts coming from a number of other countries. This can affect trade statistics, especially in calculating the value-added component of traded goods and in distinguishing between processed and ordinary exports.
New Technology: Technology like the Internet enable both corporations and workers to communicate, organize, and speak instantaneously anywhere in the world. At the same time, global subcontracting that utilizes these new technologies can mean that contract and migrant workers in many countries are without secure employment or benefits.
Talking Dollars and Yuan: The Curren(t)cy Debate
Critics in the United States and elsewhere have charged China with artificially undervaluing its currency—the yuan—by pegging the exchange rate below market value. Thus, the undervalued yuan has made Chinese exports cheaper than they would be otherwise and made American goods more expensive. The cheap yuan is blamed for American manufacturing job losses and the huge U.S.-China trade imbalance.
Since 2005 when the yuan was first revalued (then at $1=8.27 RMB), it has appreciated around 24%, to reach $1=6.31 in November 2011. In June 2010, the Chinese government freed the yuan from being pegged to the U.S. dollar, but allows it only a .05% rise or fall from its daily mid-point rate set by the Central Bank.
• China believes that since other countries have gotten rich through their exports, China has the same right as everyone else to growth via its exports.
• Is concerned that a stronger yuan will reduce their exports, which will fuel job losses, which can lead to social unrest.
• Points out that the yuan has been gradually appreciating for some time.
• Nevertheless wants to make the Chinese yuan a global reserve currency and medium of exchange like the dollar and recognizes it will eventually have to liberalize the yuan. But it will do so on its own terms of economic sovereignty, not those of its trading partners.
• Although President Obama’s administration has publicly and privately pressed China to revalue their currency, it has refused Congressional attempts thus far to label China a currency violator.
• An election year (2012) and high unemployment are once again leading the U.S. Congress to call for measures to label China a currency manipulator and for trade sanctions to be imposed on Chinese goods. Supporters include Labor and Domestic manufacturers.
• U.S. Companies and Business Groups fear a stronger yuan would hurt exports of their companies’ products from China and fear trade sanctions would lead to full-blown trade war. Trade sanctions against China may have little effect in bringing jobs back to the United States as companies may just look elsewhere.
• U.S. Consumers could face higher prices for imports from China. Some experts think that a freely exchanged yuan would appreciate as much as 20% – 30% and thus make Chinese goods more expensive.
In a time of American recession and high unemployment, many critics point to the massive trade imbalance between the United States and China for American job losses and clamor for punitive action against China.
The Economic Policy Institute found that between 2001 and 2010, the trade deficit with China eliminated or displaced 2.8 million jobs, 1.9 million (62%) of which were in manufacturing.
The usual reasons cited for the trade imbalance include: a low savings rate by Americans, insufficient domestic consumption in the PRC, an artificially undervalued Chinese currency, Chinese export subsidies in key industries, and non-tariff barriers to imports.
A Sharper Focus Reveals
I. According to the Federal Reserve Bank of San Francisco (FRBSF), the vast majority of goods and services sold and consumed in the U.S. are produced in the United States.
II. Many of China’s exports are actually produced by foreign companies, or foreign-invested firms in China. This includes many American companies, who then ship these products back to the U.S. for sale. Because China handles the final assembly of these goods, these items are counted as China’s exports, even though a U.S. firm is selling to U.S. consumers.
III. Because a product is often made of component parts that come from countries other than China, the final assembled export coming out of China carries with it value added that has nothing to do with China, but which has the effect of inflating trade imbalances with the U.S. As Yuqing Xing and Neal Detert of the Asian Development Bank Institute note, “bilateral trade imbalances between a country used as a final assembler and its destination markets are greatly inflated by trade in intermediate products.” Case in point – The iPhone:
The China Price—Impact on Wages & Jobs
Job Losses in the U.S.
Critics charge that China’s low wages and manufacturing costs (the “China Price”) have taken jobs from Americans. Many economists believe that outsourcing has taken some jobs from Americans, especially in the manufacturing sector. However, greater productivity, automation, and a continuing shift to service-sector employment, are equally if not more responsible for the loss of American manufacturing jobs. China’s main exports to the U.S.—of toys, furniture and footwear (see table of exports/imports on page 5) —are labor-intensive products which have largely been made outside of the United States for many years now because of cheaper labor abroad.
Job Losses in China
Wages have risen in China (between 1978 and 2009, wages jumped almost 13% a year, six times the pace of American wages; also see fig. below), in turn driving up manufacturing costs, and forcing multinational and American corporations to do one of three things:
1) move their factories to other cheaper countries such as Cambodia, Indonesia, Vietnam and Bangladesh;
2) move their operations to China’s interior provinces where costs and wages are still lower and surplus labor can still be found (Foxconn)
3) a handful of American companies have moved some of their operations back to the U.S. (“insourcing” or “reverse sourcing”), including Dell, AT&T, Citigroup, Monster, Caterpillar, Inc. Likely, the big corporations will continue to move or spread their operations wherever it is financially profitable to do so, while taking into account proximity to clients as well. With the end of the China Price, it is likely that even if China did not revalue its currency, we will all be saddled with higher prices in the future.
© Copyright 2012, U.S./China Media Brief Program, UCLA Asian American Studies Center