Every year, the United States and China have a forum called The United States-China Joint Commission on Commerce and Trade.  In past years this forum has often been more for show then action.   This year, with the possible exception of intellectual property rights, it seems that it is more of the same.   The United States complains about access to their markets, and in past years how they artificially keep the value of their currency low.  The Chinese agree to look into opening up markets and proceed to blame the United States for the problem.   

On the issue of intellectual property rights, the United States has been asking the Chinese government to crackdown on counterfeiters for years.  Other than some high profile “raids” against counterfeiters of product where the legitimate companies set up shop in China, not much was done.   The counterfeit market in China is continuing to grow exponentially and was estimated at almost $8 billion last year.   The Chinese government is not incented to address the problem since most of the counterfeit goods are produced there.  Shutting the counterfeiters down hurts their economy more then it helps.  Since the Chinese government continually has shown that they do not care about international laws do not expect much of a change moving forward.  The potential positive from the talks this year revolve around one person, Mr. Wang.  Mr. Wang is a top economic policy maker who took the unusual step of agreeing to personally oversee the “public campaign” against piracy.  It would be better if the oversight was on a crackdown instead of a “public campaign”, but it is a step in the right direction if he actually does more than talk.  

The talks did have its share of issues that seem do something, but did not really accomplish much.  China agreed to “revise”, whatever that means, a catalog of industrial equipment and heavy machinery used to promote the production of the items by Chinese companies.   They also agreed to work with the United State on “smart grid” technology standards, but there was no commitment to have a unified standard.  On the issue of wireless technology China agreed to “remain neutral”.  I am not sure how the Chinese agreeing to not change anything equates to easing access to those markets.   The last major accomplishment touted is the Chinese government’s willingness to let foreign companies use their experience in wind farm development in other countries to qualify them for projects in China.  This change gets them in the game, but how many of these projects do you think will actually be awarded to foreign companies, and especially those who manufacture outside of China.

In the end, the Chinese again put the blame for the trade imbalance on the United States by implying that there would be no imbalance if we just reduced the export restriction on high-tech items.   Relaxing the export restrictions would only account for a relatively small percentage of the trade imbalance, so it does not solve the problem.  The bigger issues are really that we cannot trust the Chinese in how they would use, and more importantly, how they would protect the high tech technology.

My biggest hope for the talks is in an area that they agreed not to cover, the valuation of the renminbi.  The Chinese have often shown an unwillingness to do things that they are being pressured into doing.  By taking the renminbi out of the talks, the Chinese can appear to the world as making a change on their own and not under pressure from the United States.  Maybe it is just wishful thinking, so as with everything with China we will have to wait and see.

Consumption

 We all know that Americans over consume.   Well, at least they did until this current recession started.  As stated in a previous post, I also think that we will return to our past consumption habits when the economy gets better.  I just hope that when we return to our past consumption levels we won’t use artificial equity in our homes or expensive credit cards debt to finance it.

American over consumption is one of the main reasons touted as the cause of our trade imbalance with China.  If you compare the percentage of gross domestic product (GDP) due to household spending of the United States verse other areas, the numbers do support American over consumption.   Currently, about 70 percent of the U.S. GDP is due to household spending.  In Europe, the number is around 57 percent.  In India it is a little less at 54 percent.  China, by stark contrast, has a relatively minimal number of 35 percent.  The numbers show us that not only does the U.S. over consume, but China greatly under consumes. 

I am not implying that Europe and India are the gold standard, but they do represent a good yardstick to compare to.  If you compare the U.S. to the European zone you get a 13 percent differential between the two areas.  Comparing China to India shows a relatively high 19 percent difference.   This does not mean that China’s under consumption is a bigger cause of the trade imbalance then American over consumption, but it is still a problem.  Other contributors like the artificial manipulation of currency have a large role in the trade imbalance.

So why is the lack of consumption in China a bad thing?  The main problem with such low levels of consumption is because that any significant growth of China’s GDP has to be export driven.  This is the underlying reason why the Chinese government can not let the renminbi appreciate naturally.  A more expensive renminbi translates into slower growth and less jobs and social unrest.  Already in this global recession the Chinese government has estimated that over 20 million jobs have been lost in the manufacturing regions of the country.  The good thing is that it seems that the Chinese government now recognizes the need to stimulate domestic consumption. 

One of the reasons that the Chinese do not consume as much as they could is that they feel they need to have money saved as a form of insurance.  If an average Chinese citizen gets sick or is hurt and needs to go to a hospital, they must first pay for the service.  To help alleviate this problem, the government now plans to provide health insurance to hundreds of millions of people over the next few years.

Another area where China is improving involves automobiles.  China recently cut the tax rate on fuel-efficient vehicles.  The tax cut led to a surge in the number of vehicles being sold in China.

As the Chinese consumer starts consuming more they will not only help China’s economy.  The world economy can no longer survive on the U.S. consumer alone.