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Saturday, Jan. 28, 2012

America's China syndrome

Special to The Japan Times

HONG KONG — How much does the United States depend on China's willingness to buy U.S. treasuries to pay for American profligacy? How much do spendthrift Americans rely on China to feed their greedy habit for cheap consumer goods? If you were to ask the average American, and probably the average world-aware Chinese, you would probably get a high number, say 40 or 50 percent — surely not below 20 percent.

The correct answers are so low as to make you blink. China, including Hong Kong, holds about 7.5 percent of U.S. treasuries totaling $14 trillion, according to calculations based on U.S. Treasury reports. China's share of U.S. consumption expenditure is just 2.7 percent based on "Made in China" imports. If you think that's low, the actual figure is lower, a paltry 1.2 percent if you strip out the value of the work done in the U.S. to put "Chinese" goods on American shop shelves.

These figures should make politicians and opinion-makers think hard about the implications of the way in which they approach economic relationships. The lessons are that they need to be more careful about slinging mud about unfair trade practices or demanding protection.

Information for U.S. treasuries relates to September 2010, but will probably not have changed much. China, keenly aware of the exchange rate risks — and the political risks — of holding large dollar assets, has probably reduced its holdings. News reports, including that this month China's sovereign wealth fund bought an 8.68 percent slice of Thames Water in the United Kingdom, testify to Beijing's wish to diversify and get better earning potential from its reserves.

In fact, 42.2 percent of U.S. treasuries are held by American institutions and individuals and 17.9 percent by the Social Security Trust Fund. Other slices of 6 percent and 2.1 percent are held by the U.S. Civil Service Retirement Fund and U.S. Military Retirement Fund.

This means that Americans hold almost 70 percent of U.S. debt. "We depend far less on the kindness of strangers than you might imagine if you listen to the intertubes," says Barry Ritholtz in his blog The Big Picture.

Japan holds another large chunk of 6.4 percent and the U.K. has 3.4 percent.

China's big holding reflects both the fact that the dollar is still the world's pre-eminent reserve currency and the Faustian bargain struck between the two countries as China geared up its exporting machine and American consumers welcomed a surfeit of "Made in China" goods comprising everything from home furniture and electronics to T-shirts and sneakers.

But even when it comes to dressing and amusing Americans, the U.S. is a long way from having sold out the family store to China, whatever you might think when shopping at Walmart with its aisles and shelves crammed with goods with Chinese labels. Walmart is big, with $260 billion in U.S. revenues, but the U.S. is a much bigger $14.5 trillion economy.

Galina Hale and Bart Hobijn, who work for the Federal Reserve Bank of San Francisco and write in the bank's FRBSF Economic Letter, offer a sense of perspective and reality on what is actually happening. The two authors say: "Although globalization is widely recognized these days, the U.S. economy remains relatively closed. The vast majority of goods and services sold in the United States is produced here. In 2010, imports were about 16 percent of U.S. gross domestic product. Imports from China amounted to 2.5 percent of GDP."

They analyze the figures in terms of U.S. personal consumption expenditures and found that in 2010, 88.5 percent of U.S. spending was on items made in the U.S., leaving a foreign share of 11.5 percent, including 2.7 percent for China. It may be argued that there is a copout element in the figures because consumption includes services, accounting for two-thirds of all spending, which are predominantly items like housing, transportation and medical services, in which foreign companies are hardly involved. It is not easy after all to import a haircut from China.

But even if you strip out services and look at other categories of American consumer spending, China does not achieve a dominant share in any area. In durable goods, which include cars and electronics, the foreign share rises to 33 percent, and "Made in China" goods account for 12 percent, including 20 percent of furniture and household equipment.

Among nondurable goods, including food, clothing and fuel, "Made in USA" is 76.2 percent, and the foreign share is high partly because of imported energy. The one area where the U.S. imports more than it exports is clothing and shoes. Here the U.S. share is only 24.9 percent, and China jumps to 35.6 percent.

Authors Hale and Hobijn point out further that if a pair of "sneakers made in China costs $70 in the United States, not all of that retail price goes to the Chinese manufacturer. In fact, the bulk of the retail price pays for transportation of the sneakers into the United States, rent for the store where they are sold, profits for the shareholders of the U.S. retailer, and the cost of marketing the sneakers. These costs include the salaries, wages and benefits paid to the U.S. workers and managers who staff these operations."

Their cost analysis shows that of the 11.5 percent of U.S. consumer spending on foreign-produced goods and services, 7.3 percentage points are for the import cost and the other 4.2 points are for U.S. activities. They add that for imports from China, the U.S. share is much greater: The true cost of imported goods from China is not 2.7 percent, but 1.2 percent, as the rest of the price goes into American pockets.

"On average, of every dollar spent on an item labeled "Made in China," 55 cents go for services produced in the United States." The authors say this is because retail and wholesale margins are higher on consumer electronics and clothing than on other items. It is also because many imported goods are produced in factories in China at the direct behest of companies like Walmart and Apple. The Americans have used their muscle to keep labor costs at rock bottom.

There are moral issues here: Should big U.S. retailers pay "slave wages" in China and other developing countries, raise wages and reduce margins, or raise prices to continue domestic production as President Barack Obama urged in his State of the Union address? The connection of big Americans with China's exports shows the hypocrisy of political demands for protection against the Chinese intruders.

Kevin Rafferty is editor in chief of PlainWords Media

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