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Sunday, November 15, 2009

China's Threat

Once in a while in life, we learn certain truths that are so profound and so true that they effect much of our thinking. One of those truths for me was that circumstances are not usually reflective of the truth.

President Obama is in Asia this week. The late night talk shows have found much fodder for their political jokes in this trip. One was heard to say that President Obama went to China to, among other things, visit America's money. Ha! Ha!

It seems that in recent years Americans have acquired a very jaded view of China's relationship with the U.S. One can hardly visit Walmart or a toy store without finding what seems to be the vast majority of items manufactured in China. At the same time, China has been the largest buyer of U.S. debt in history.

The media is constantly talking about the growing "tiger" in Asia. They're clamoring for the world's resources in all other continents. China's consumption of oil is driving up prices. China is becoming "a force to be reckoned with" economically. We speak of China's economic growth as if it were a military threat. And it has many Americans worried.

The circumstances would suggest that China is slowly taking over. I have to confess that I too feel despondent sometimes when I read that more American jobs were lost to outsourcing. I get disgusted with the number of items in my home that are made in China (the most preposterous of which is aspirin).

Those are the circumstances. They are very real. But what is the truth? As you might guess, the truth runs a little deeper. And it doesn't necessarily support the appearance that the circumstances would present. Let's consider a couple of examples that might help put China in a better context for Americans.

While we bemoan the tragic loss of industrial capacity (and manufacturing jobs) in the U.S., we still produce more than all of China and Japan combined.

The U.S. currently produces about 25% of the entire world's output. Our output is larger than the combined gross domestic product of the world's next three largest economies - Japan, China and Germany.

Americans seem to simply not know our own strength! If the U.S. continued to grow at about 2.5% per year (which most economists say is very realistic for us), China would have to grow at 8.2% per year just to keep the present absolute gap steady (i.e., not fall further behind us). Simply put - it will take the Chinese generations to catch up.

China suffers from deep poverty, the level of which Americans simply cannot understand. While China has a population of about 1.3 billion people (more than 4 times the size of the U.S.), nearly half of them have an income of less than $1,000 per year. Another 440 million of them have incomes of between $1,000 and $2,000 per year. In fact, only 60 million Chinese have incomes of $20,000 or more per year! China's poverty is truly sitting squarely at third world levels. America's poorest families would still look rich when compared to China.

Moreover, China has problems that greatly limit the ability of its people to climb out of desperate poverty. It has one of the world's highest levels of bad debt. We worry about the government bailout of U.S. banks because of their bad debts (i.e., borrowers who don't pay back the loans). But banks in China have much higher levels of bad debt. Since most of the larger banks in China are already owned by the government though, no bailout is needed - and no public spotlight is put on the banking sector by the (government controlled) media.

Since Chinese citizens are so poor, they are not high consumers of anything. Most of those who are gainfully employed in manufacturing or other jobs in China are because of external demand. Both China's employment and gross domestic product are highly dependent on external demand (from the U.S. and other western countries). Simply put, if we stopped buying things made in China, it's economy would collapse almost overnight.

China has the same kind of demographic issues that Japan has - an aging population, low birth rates and too few women to produce balanced families in the future). The big difference between China and Japan when it comes to demographics is that Japan is suffering its greatest population decline now ... while China will have its population decline later (a generation or two from now).

So while it may be that the Chinese have joined and are playing a growing role in the world economy, they are far from being in charge of it. And Americans need to look beyond our consumerism to the leadership role that we still have in the world. It's a leadership that no one has taken from us, and one that should not be abdicated in the face of our own current economic challenges.

China's role will continue to grow. But for the foreseeable future, the U.S. remains the most powerful nation on earth in terms of both military and economic strength. And that's the truth!

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