Perspectives on China and India: China and the U.S.

November 12, 2012

While China will become the world's largest economy within a decade if it maintains its high growth rate, Chien points out that even if China and U.S. have the same GDP, the U.S. per capita GDP is still four times higher than China's per capita GDP. China's per capita GDP is expected to remain this way for decades. In terms of trade and U.S. jobs, Chien discusses why the impact is not as great as one might think and how a rising China can provide opportunities for the U.S., particularly in the financial services, education and entertainment sectors.

Presentation (PDF)


YiLi Chien: This comes back to the initial question we imposed. The news media is always saying that, well, China is going to be the richest country in the whole world indicates the decline or failure of U.S. economy. This is the wrong opinion. Let me tell you why. So it could be the case that China keeps its high growth, even if not as high as 10 percent but a little bit lower like 6 or 7 percent. So anyway if the growth rate is higher than the United States, sooner or later they're going to be the biggest economy, there's no doubt. But if you're thinking about how many people in China in terms of the personal living standard, United States is way, way, way ahead of United States. Even if U.S. and China have the same labor over total GDP, but if you count as the per person living standard which is normally measured by per capita GDP is still four times higher than that in China, then we would be still much higher than that in China for many years to come. So the rising in China shouldn't be considered as a failure or some indication of a relative decline in U.S. economy. This is the first message I want to deliver.

Let me switch a little bit on the topic. So last we were looking forward, but currently we have the problem with China which is in terms of trade. Why is that? Because over here. So last year, for example, the U.S. imported almost 400 billion goods from China while we only exported a little bit more than 100 billion goods to China. So obviously this imbalance in trade drew a lot of attention, not only in politics but also in terms of economic research. The good thing about trade with China is it's obviously going to improve U.S. consumer welfare. If you go to Walmart or Target today, you're going to be amazed, a few bucks, how much you can buy. Always contributes from the shipped goods from China.

But the biggest concern normally associated with this topic is that is trade with China taking away U.S. jobs, are we losing jobs to China, so on and so forth. So this is the key topic I would like to discuss today. Of course, there are some other trade issues with China which I cannot cover given the limited time, but we can talk about this in the Q&A session. But before I proceed, again, I would like to ask you the following questions. For every $100 spent by the U.S. consumer, how do you think like how much goes for the goods which are made in China? Well, so the majority is between 20 and 40, and, well, it's kind of even, like between one, two and three. And actually the correct answer is four. So the lowest one that we have.

So you can say how is this possible. My clothes, my shoes, my watch, the pointer is all made in China. How this is possible, right? So here's why. Actually it's much less than $5. So the data show that we only spend $2.7 on Chinese products for every $100 we spend. Why? Because the U.S. economy right now, most of that is provided by the service sector. We spend 2/3 of our expenditures on the service, so $67 out of 100. So what is service? Suppose it's housing, suppose you rent an apartment or you rent a house, this is housing service. And so many other expensive services. You hire a lawyer, my God. You go to see a doctor, you're going to think I have medical insurance. And you send your kids to college. No? Loans are a really expensive service. Moreover, when you watch TV, you don't need the TV itself, right? Not only you need a TV itself, you need a cable service. Or you talk on the cell phone. Not only you need a cell phone itself, you also need to pay AT&T, Verizon or T-Mobile. This is all about service. And there's zero of that from China.

So the second one is the one, another answer is spending on durable and non-durable goods. So let me start with the durable. We spend $10 out of 100 on that. This is your car, your furniture, your TV, your cell phone, electricity, et cetera. The biggest component here might be the car which almost zero from China. So of this $10, we only spend $1.2 on Chinese product. For the non-durable service, the major spending is food and gasoline. None of that is from China. So we do spend on clothes and shoes on Chinese product, and most of that are low-end apparels. So we only spend 1.5 on Chinese product. So in total, we only spend 2.7 which is quite surprising, right? So come back to that. The number I showed you in the very beginning where the import from China is almost 400 billion. This is huge in terms of quantity, but relative to U.S. GDP, it's only 2.6 percent. We export to China even less. It's only less than 0.7 percent of U.S. GDP.

So the issue to trade with China might not be as severe as you think. So the question that does trade with China reduce U.S. jobs? Unfortunately the answer is yes, for sure, but probably not as much as you thought, not as much as you have impression from the media. So the reason for that is, as I showed you, the U.S. consumers do not spend that much on Chinese products is the first one. And even for this 2.6 percent we import from China, not every one of that is associated with U.S. jobs. Many of the jobs associated with goods imported from China has been long gone from the United States, like shoes or clothes. They were produced probably 20 or 30 years ago already in Taiwan, Korea or Hong Kong. Right now it's shipped to China.

So the actual amount is going to affect the U.S. economy is quite small. However, we should keep in mind that those people who will be affected by the trade with China mostly tend to be poor, the low-income unskilled labors. So a fraction of many factory worker might suffer the most. And according to the news research, actually this worker when he gets this hit and they lose their job, it takes a much longer time for them to find a job again.

So in summary, so today we go through a few topics. The first one is the high growth rate in China. So I want to give you the impression that the high growth rate in China, not a big problem to United States. If you're thinking in terms of per capita GDP in United States, we are still much higher. Right now it's five times higher than that in China. And even if China kept up with United States in terms of total size, but we're going to still be like four times, three times higher than United States for many, many years to come. Another issue I covered is the trade with China. It does reduce U.S. jobs, but probably not as much as you thought.

Finally, or more positively, I would like to think about the rise in China actually provides a really good opportunity for U.S. business. As Chinese people get richer, what do they want? They want to have high-end product. They want to have more quality services. And this high-end product and the quality service, U.S. business is good about. So, for example, we can sell the service to China. What kind of service? Financial services, right? Because right now the financial service in China is almost none. Educational service, the universities in the United States have a much higher reputation compared to those in China. And then we have entertainment service like baseball, basketball, all this stuff is really popular in China.

So in conclusion, so hopefully I can provide you a little bit more insight about underneath those stories which are reported in the media. And if you have any further questions, I will be more than happy to answer them in the Q&A session. Thank you.

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