To hear the alarmists tell it, the emergence of China as an economic superstar is bad news that is only growing worse.
Their familiar cries -- China has an unlimited supply of cheap labor that threatens American workers, China stacks the deck against foreign companies that invest there, China will destroy American manufacturing -- were recently reinforced with a new one: Last year, for the first time, China probably bested the US as the world's top choice for foreign investment.
China's economic firepower is real, and growing fast. It will inevitably affect the American economy. There is some truth in the alarmists' warnings, but they hardly tell the whole story.
China's influence takes many forms that are subtler than the loss of low-wage manufacturing jobs in the US or the opening of a huge new consumer market in China. The costs and benefits of the trans-Pacific relationship are much more complex than simple gains and losses from trade. They extend to the bedrock of the American economy, including the productivity of the labor force and the stability of financial markets.
"Our fates are becoming inextricably linked," said Paul A. Laudicina, vice president and managing director of the global business policy council at AT Kearney, a consulting firm. "China is as important to the US as the US is to China."
Recent figures on trade and investment can overshadow other important trends. Since 1997, the US trade deficit in goods with China has doubled to more than US$95 billion. The trade surplus with China in services, which make up more than half of the American economy, increased by more than 50 percent, but just to US$2.2 billion in 2001.
The estimated totals for direct foreign investment are a trifle misleading. The American figure declined mainly because of a drop in mergers and acquisitions involving foreign companies, which have accounted for 90 percent of investment flows in recent years.
Even when these figures are interpreted correctly, however, they are only excerpts from a story with much wider consequences. China's growth has been reinforcing one of the most prominent trends in America's recent economic history: its transition from a manufacturing to a service economy. In the last two years alone, the economy has shed 2 million manufacturing jobs. Now, only about 16 million Americans work in manufacturing, the same as in the early 1950s. Since then, though, the number of Americans in service professions has risen to 107 million from about 30 million.
Accelerated change
China is "accelerating the structural change" taking place in the US, said Daniel J. Meckstroth, chief economist of the Manufacturers Alliance/MAPI. "We're moving the high-labor-cost jobs, the low-technology jobs and the low-capital-intensive jobs abroad."
The manufacturing sector was doomed to shrink, he said, because its productivity has grown faster than the overall economy. But an acceleration of the process has come at a bad time for workers.
"What makes it so painful is that it's occurring in a period where the US economy is weak," Meckstroth said. "This recovery is abysmally slow, particularly in the manufacturing sector." Because China maintains a fixed exchange rate with the dollar, he added, that economic weakness does not help American companies pump up their exports.
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