They both scare me more than Chinese toothpaste.

This afternoon while reading through some back stories on the U.S. China Economic and Security Review Commission, I came across an op-ed piece written by Kerri Houston for the Cincinatti Post called China’s business practices threaten jobs here.. and I was shocked.

Keep in mind, on the About Us page of the USCC website, it says:

The Commissioners are supported by a professional and administrative staff with extensive backgrounds in trade, economics, foreign policy, and U.S.-PRC relations. Some are fluent or proficient in Chinese (Mandarin), and most have significant prior working and traveling experience in China and Taiwan

So, I was shocked really to see a commissioner use this level of fear mongering, slander, and bs in writing up the core of her op-ed.

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Following a recent post called Is China Export Led, I recently found another paper written by Albert Kiedel of Carnegie Endowment for International Peace, who wraps up his summary of his article China’s Looming Crisis - Inflation Returns (PDF HERE) by saying:

U.S. intelligence analysis of this overheating risk should refute the conventional wisdom that China’s growth is export-led—it is clearly domestically driven.

Policy makers need to realize that China’s rapid economic rise is homegrown and sustainable. The United States should quietly remind China that harsh handling of inflation-related unrest could seriously damage U.S.-China relations—especially in a U.S. election year.

Far more aggressive than Jon Anderson in attacking common wisdom, Kiedel’s audience is obviously policy makers who he see are looking at China though McCarthy eyeglasses (tinted with Lead painted Barbie)… and that gives his analysis a much different feel (both reports are well written and as a lay person I have no trouble following the logic of either)

In his article, the tied between exports and the economy is actually a secondary concern as his primary concern is that inflation is a real threat to the Chinese economy (he pulls out a lot of stats in support).

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UBS Managing Director Jonathan Anderson recently released an excellent report entitled Is China Export-Led? that is a must read. It is one of those documents where everyone will learn something or have a myth busted

Part of their Asia focus, Jon and his team have 1-2 reports that come out each week, and this week they have decided tolook at one of the biggest myths (”The Granddaddy”) surrounding China and its development… that it is led by exports.

Peeling the layers of the onion off, Jon and his team structured the report to address the following issues (many of these issues are supported by their own reports) to understand the actual contribution of exports to China.. and more importantly what that means in terms of global exposure should something occur (US recession…)

Please note: as I am not a master or PhD in economics and as it has been 10 years since I have looked at an econ book, I would suggest you read the report yourself as what I am about to write may not fully reflect what UBS found… but here goes.

1) How “big” are China’s exports?

For anyone who has been to China, it is clear that exports have historically played a large role in the macroeconomic picture. The cities on the east coast have outgrown the cities in the west, central, and northeast, and that phenomenon has defined China. But counter to the thoughts of many, this report shows that China actually may not be as dependent on growth from exports.

In building this, the first thing the report does is address the statistics, and how looking at a pure export/ GDP ratio is not the best way to measure. After all, were that the true measure, then HK would have exported its economy twice over (exports/ GDP = 2 in HK).

So, to get to the real figure they:

we need to restate the headline export figure in valueadded terms, and this means two things: (i) stripping out the associated import content to find out how much of export revenue actually accrued to the domestic economy, and then (ii) converting that domestic content share into value-added terms by subtracting input purchases from other domestic sectors.

and what they found through their exercise (read report for to understand adjustments), they found that the 40% figure was reduced to under 10%.. a much different perspective

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In doing some research on the currency bill (post coming soon), the actors behind the movement, and the underlying issues, I cam across tow documents that are must reads: Seven Myths about U.S. - China Trade and Investment authored by the U.S. China Business Council and Facing Protectionism Generated by Trade Disputes authored by Wing Thye Woo and Geng Xiao of Brookings Institute.Seven Myths about U.S. - China Trade and Investment (PDF download here) is a simple 2 pages that breaks with members of the administration

1. American companies invest in China to shift jobs there and export back to the United States
2. China is causing the decline of American manufacturing
3. China’s market is closed to American companies
4. China WTO entry was a bad deal for America
5. China doesn’t allow American companies operating there to be profitable
6. China’s undervalued currency creates a large trade deficit and prevents American companies from selling more to China.
7. China forces American companies into joint ventures

Simply put, USCBC is looking to shatter some of the most common myths that are found in the media today, and they have in 2 pages done a great job of covering the basics. For myself, I agree on all points as China actually does not force anyone to do anything, and if you look at the markets of China one will see that American products from every category can be found. the problem is that “American products” made in America and “American products” made in China are treated differently by the administration.

If I were going to add a myth buster of my own, it would be that the surplus that China counts is actually more relevant than the defect the United States reports as the U.S. lumps Hong Kong into the statistics. Maybe I am parsing the line, but the next report does make a strong case for me.

Facing Protectionism Generated by Trade Disputes (PDF download here) is a much more robust article at pages, and is one of the best piece I have read recently (partially because they back up my theory that historic trade statistic tools do not represent today’s reality - see here and here). Through this paper, the authors sought to answer the following:

1. What are the problems caused by the trade imbalances?
2. What are the problems revealed by the appearance of trade imbalances?
3. Is a large Yuan appreciation the best cure for the trade friction?
4. What is to be done?

Why this document is so powerful, and should be read by anyone interested in the trade deficit, is that unlike a lot of economist writings this paper is easy to understand, the logic is easy to follow, and they are plenty of statistics to support their conclusions

I could pull out a lot of information on the report, but I think it is best just to encourage readers to go and download the report. there is a lot of background, there are supporting stats, and unlike a lot of reports, it is very balanced in its approach and reasoning.