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U.S. China Trade As Zero Sum Game

By Dan Harris on Posted in China Business, Recommended Reading

I recommend you read a just out Reuters article on U.S. China trade. It does a better than average and fairly thorough job setting out what we can expect in China-United States trade relations. The article is entitled, “US and China on collision course for trade war? It is subtitled, “The problems Americans are seeing with their economy are only going to get worse as China rises.” 

My two cents:

1.  The article seems to view as a bad thing that American multinationals are profiting from China. The article talks of how multinationals are making short term profits from China at the expense of their American employees and their own long term profits. I do not disagree that this can be the case, but I find it curious that they would lump Yum Brands in with this and seem to complain about how Yum Brands (owner of KFC, Pizza Hut, and Taco Bell) now reports 75 percent greater profits in China than in the United States. I would contend that Yum Brands making money in China is a flat out good thing for its United States employees and for the United States as a whole.  

2. The article talks of Henry Nothhaft, CEO of Tessera Technologies, who says “most innovation occurs on the factory floor, so he worries that American innovation will slide with the erosion of the country’s manufacturing base.” I have to admit that had never even occurred to me until now, but it does make sense.

3. The article ignores how U.S. companies manufacturing overseas can actually both save and create American jobs. Forbes magazine did a great article, entitled, “One Way To Save U.S. Manufacturing,” on a specific micro-example of how this can happen, using one of my clients, SmithCNC, as the poster child. 

What do you think?

  • HI

    Yum’s profits are peanuts compared to the long-term costs of the destruction of American manufacturing and innovation. America is becoming in economic terms a Chinese colony–exporting agricultural products, raw materials, and claims on its fixed assets (i.e. its wealth), and importing labor- and technology-intensive finished goods. During the colonial times, European powers had to use their militaries to achieve this kind of relationship. America’s been doing it willingly. Mindboggling.

  • lark

    American jobs have been flowing overseas, that is a fact. The MNC’s have cut 2.9 million American jobs in the last decade and created 2.4 million overseas.
    Of course when the chips are down these leeches expect to have their interests protected by the American military and court system.

  • Tim

    This article continues with the same tired assumptions that plague most of the writing on US/China trade relations beginning with the fallacy that US’ trade imbalance is hinged on China rise; failing to understand that the sophistication of global value chains means that more than one country is often involved in the production of today’s goods.
    Industries with thin margins will always seek locations with the lowest costs – this has been happening since the Industrial Revolution began in the UK and Americans began ‘stealing’ their jobs and IP. If it wasn’t China it would be someone else.
    As emerging markets continue to develop, successful businesses begin looking outward for growth. Japan and its investment into the US is indicative of the trend that both China and India are also gradually beginning to fill.
    Sadly, as we play the blame game, which makes the likes of Mr. Trump popular, we miss a number of indicators occurring locally: a jobless recovery due to a combination of limited labor protections and a work ethic on steroids; a financial meltdown that has seen no successful prosecutions and no significant reforms to our financial system; a polarized government distrusted by its constituents and emasculated by an ever-growing corpus of inane regulations and special interest.
    It’s time to move past the perceptions of our loss is primarily because of their gain and look to reshaping the country.

  • CM

    I would agree with you that Yum Brands making money in China is a flat out good thing for its United States employees and for the United States as a whole.

  • Ben

    Dan – Chewing on your blog post at the same time I’m reading Clyde Prestowitz’s “The Betrayal of American Prosperity”, which @ some level speaks to the tension between how MNCs benefit from being in China while American workers may not (or at least may not feel they do). Regardless, check out Scott’s blog on this report as well: http://chinatrack.typepad.com/blog/2011/04/the-us-china-business-council-and-amcham-love-vs-tough-love.html

  • David

    @ lark There is also the rise of international arbitration and alternative international legal institutions that MNCs & other parties can and do bring claims.
    Yum’s profits in China are as high as the growth in obesity in the country. So if you ever want to see how well Yum brands are doing in any location in the country, cross-reference this by weighing students in Chinese middle school classrooms.
    I think that the alternative, saying that MNCs should not exploit markets where they can gain a global competitive advantage is anti-capitalist. To think that our nation’s innovation will slide with the erosion of the US manufacturing base does not seem inaccurate on its face–but don’t you think innovation comes in many forms? I’m confident there will be a point in time where ‘Made in the USA’ has it’s own momentum, both domestically & overseas.

  • SH

    The U.S. is still the world’s top manufacturer, producing 21% of global manufactures, despite the economic decline. China comes in at third with 12%.
    Yes, there is a problem, but blame shouldn’t be laid entirely on MNCs. The U.S. slow movement on securing new trading markets (and China’s momentum), union wages, and a 35% corporate tax rate certainly contribute.

  • LH

    Mr. Nothhaft’s point (that innovation occurs on the factory floor) was put at length and rather eloquently by Andy Grove (founder and former CEO of Intel) in a piece published on the web about a year ago. I don’t have the link to it offhand, but it is well worth reading. The thing is that in many high-technology industries, there are two central problems that are both closely related to the “factory floor”. The first is that successfully manufacturing — for example, raising yields in semiconductor manufacturing — is precisely a problem of practicalities on the floor, in the manufacturing process itself, for which close observation and first-hand experience is essential. The other is that the “back end” of a manufacturing business is close to the customer and gets essential feedback about quality, features, etc., concerning the product and so is an important part of “corporate understanding”. Dr. Grove’s piece addresses the topic in a lot of other dimensions — well worth reading.

  • Richard

    This is the Andy Grove article: http://www.businessweek.com/print/magazine/content/10_28/b4186048358596.htm
    I think he pretty clearly spells out the problem for the U.S. economy: “You could say, as many do, that shipping jobs overseas is no big deal because the high-value work—and much of the profits—remain in the U.S. That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work—and masses of unemployed?”
    See also “Unsustainable“ and “In Praise of Hard Industries“ by Eamonn Fingleton, who is a little bit nuts but is certainly right on the core issue: the shift to a “post-industrial” service-based economy has been a net loss for the American workforce. Tyler Cowen’s “The Great Stagnation” reaches similar conclusions. Not everyone can be a software engineer, financial analyst, or lawyer. American manufacturing created the American middle class. Where will Americans work as manufacturing continues to decline? Maybe all the millions of laid-off line operators can be one of the 450 employees at Twitter, or the 2000 at Facebook. These “billion dollar companies” don’t create jobs the way industry does. The Chinese government clearly understands this (as does Japan, Germany, Korea, Taiwan, etc.). Meanwhile, U.S. manufacturing is being hollowed out by global competition–not just Chinese competition. Take a look at the supply chain for one of America’s supposed key export products of the future: the Boeing 787. The majority of the inputs are not from U.S. suppliers and Boeing only has around 1200 workers assembling the finished plane with parts sourced from global suppliers (and that model has not worked out quite as planned, needless to say). Does anyone think for a second that when China starts mass-producing large planes, the majority of the supply chain won’t be Chinese? Don’t worry, though, the U.S. will have plenty of investment bankers to underwrite COMAC’s IPO.

  • Twofish

    I’m not too worried about trade protectionism, since we are at the point that any restrictions on Chinese trade are going to cost more jobs than they create….
    There are some other things that worry me….
    One thing that people have to realize is that multi-national corporations are multi-national and don’t owe any particular loyalty to any one country. For example, suppose a company decides to move jobs from the United States to India. This may be a bad thing if you are American, but if the people that are making that decision are French or Indian, the fact that it costs US jobs is just not going to enter into their decision making. Nor should it. If you are French or Canadian, I’d hardly expect you to care that you are moving jobs from the US to India.
    There are two things that seriously, seriously worry me:
    1) the idea that the US is o.k. because it keeps the high value jobs. The problem is that tomorrow’s high value jobs are done by today’s low value workers. Something that seriously worries me is that you see a lot of basic coding jobs going off to India or China, and those are the stepping stones to high value jobs.
    2) the US is massively underinvesting. The US somehow has gotten captured by economic theories that argue that investing is bad, consumption is good, and governments can’t do anything right. This means that there is a huge lack of investment into public infrastructure (both human and physical) and this is going to hit the US badly in the future.
    Both US and China have made radically different bets on how economies work.
    Richard: Not everyone can be a software engineer, financial analyst, or lawyer. American manufacturing created the American middle class.
    Actually, everyone can. The problem is that all of those jobs require huge amounts of education, and this requires a lot of investment in education, and that is being cut. Technology is a wonderful thing in general, but it gets rid of a huge number of low skilled jobs.
    Richard: Don’t worry, though, the U.S. will have plenty of investment bankers to underwrite COMAC’s IPO.
    If that were the case, I wouldn’t be alarmed. The trouble is that in order to be a competent investment banker you need a masters degree, and those jobs aren’t available for people that only have a high school (or below) education.
    The other problem is that you really want a diverse set of industries. Mono-industrial countries tend to run into lots of problems when there is a shock.
    If the government were putting huge amounts of investments so that people in the US could be investment bankers or aeronautical engineers, that would be fine, but universities get getting seriously cut back.

  • Ames Tiedeman

    The United States has not had a current account surplus since 1975. We have not had a trade surplus with Japan since April, 1976. We have been in deficit with the EU since 1983. We have run trade deficits with both Russia and China for more than 20 years. How did America go from being the largest creditor nation in 1975 to the largest debtor nation by the end of the 1980′s? To understand what has happened one must go back in time. Prior to 1860 much of the Western World practiced Mercantilism. After 1860, led by Great Britain, Mercantilism was abandoned in favor of the teachings of John Locke and the free trade principles of Adam Smith. Trade barriers throughout Europe came down. A great debate on economic policy took place in America. Lincoln for instance was a Mercantilist. For the next 110 years the Western World basically traded with itself. Good flowed across the Atlantic and trade disputes if they arose were generally settled quickly. By 1970 the world was changing. The post world war II era produced the eventual rise of Japan as an economic machine. Goods started to flow from Japan to the United States and to Europe. The problem was that goods were only flowing one way. America for instance was banned by Japan from selling rice or apples to Japanese consumers. While disputes like this in many industries were festering, Japan was quietly becoming a world power in automobile and electronics manufacturing. Auto’s and electronics were exported out of Japan at an ever faster clip. By 1977 Japan was running steady trade surpluses with the United States and American politicians were raising alarms that Japan was simply practicing protectionism. What Japan was really doing is practicing a new form of Mercantilism which I have pegged, “Asian Mercantilism.” Japan was more concerned with full employment in Japan than the loud voices of western politicians. By the late 1980′s the United States and Europe were both running huge trade deficits with Japan. After 15 years of trade deficits America had found herself in the position of having gone from being the world’s biggest creditor nation to being a debtor nation. The rise of China over the past 20 years has given the world another Japan but this time on steroids. If Japan practices Mercantilism then China practices Supra Mercantilism: Goods are exported, imports are controlled. The currency is massively controlled, not free floating. Production is favored over consumption. With a population of 1.5 billion China has been able to give Mercantilism a whole new dynamic. What we have in the world today are two competing economic models for prosperity. We have the Western model with relies on the system of Free Trade and we have the Asian system with relies on a super sized form of Mercantilism. We have the West running trade deficits and the Asians running trade surpluses. China, Japan, and South Korea are the producers of goods while Europe and America are the consumers. Who is winning the battle between Western Free Trade and Asian Mercantilism? Asia is clearly the winner. The question going forward needs to be how we reverse a trend that is leaving America and much of the western World indebted and economically broken. What the West now calls protectionism, the Asians call Mercantilism.