1. United States, China’s Problem
Ryan Herzog, Ph.D.
Assistant Professor of Economics
Prepared for the Greater Gonzaga Guild
February 28, 2012

3. Economic Measure Value
Gross Domestic Product, $11.3 trillion
2011
Population 1.343 billion
GDP per capita $8,400
Growth Rate 9.2%
Current Account Surplus $201.1 billion
Inflation Rate 4.5%
Unemployment 6.1%

4. Economic Measure Value
Gross Domestic Product, $15 trillion
2011
Population 313 million
GDP per capita $48,100
Growth Rate 1.7%
Current Account Deficit $-466.8 billion
Inflation Rate 2.9%
Unemployment 8.3%

5. United States and China
 Over the last 25 years the Chinese and U.S.
economies have become interwoven. Over the
foreseeable future successful growth within each
economy is dependent on the other country.
 China is rapidly becoming the largest export
market for U.S. goods (currently 3rd behind
Mexico and Canada).
 US is the largest import market for Chinese goods
(just ahead of Japan).

6. Trade Issues
 China has been accused of keeping an artificially
low exchange rate.
 This results in a lower price for Chinese goods
purchased by U.S. residents.
 The demand for Chinese imports has resulted in
China “stealing” many U.S. jobs.
 Over the last 25 years Chinese imports to the U.S.
have increased from $3 billion to $300 billion.
 Imports from China represent nearly 20% of all U.S.
imports.

7. What we fail to realize
 Over the same 25 year period, U.S. exports to
China have increased from $3 billion to $90
billion.
 This number will continue to grow as China slowly
shifts into a consumption based society.
 Increased demand for manufacturing jobs in
China has allowed for nearly 600 million Chinese
residents to come out of poverty.

8. China – Economic Miracle
 We often overlook the human benefit to China
1970 1980 1990 2000 2005 2010
Poverty ($2/day, % of population) 97.8 84.6 61.4 36.3
% % % %
Literacy Rate (% of females above 51.1 68.1 86.5 90.9
15) % % % %
Literacy Rate (% of males above 15) 79.2 87.0 95.1 96.8
% % % %
Mortality Rate, infant (per 1,000 live 86.6 49.8 38.3 27.3 21 15.8
births)
Mortality Rate, under 5 (per 1,000) 123. 65.3 48.3 33.0 24.9 18.4
1

9. Chinese Growth
Economic Growth of the Asian Tigers, 1961-1990
China, 1990-2009
30,000.00
25,000.00
20,000.00
GDP per Captia
Japan
Hong Kong
15,000.00
Singapore
Taiwan
10,000.00 Korea
China
5,000.00
0.00
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

10. Exchange Rates and Exports
Exchange Rate (¥ / $)
10
9
8
Since 2005 the
yuan appreciated
7
30% against the
Yuan per USD
6 USD.
5
Implied PPP Conversion
Rate
4
3
2 Today the yuan
1 remains
0 undervalued by 30-
50%

11. China
 China has followed policies similar to past Asian
tigers.
 China has artificially maintained an undervalued
exchange rates.
 Resulted in low priced consumer goods for the U.S.
 China has purchased a lot of U.S. debt, saving the
U.S. trillions of dollars in interest payments.
 China’s exchange rate is appreciating.
 Lowest trade surplus with the world over the last 5
years.
 Smallest current account surplus since 2003.

12. Job Losses in the U.S.
Employment in Manufacturing
25000 12.0
From 1979 – 2011
the U.S. lost 7.7
20000
10.0 million
manufacturing jobs
Millions of People
8.0
15000
Employment in Manufacturing
6.0
(Millions)
10000 Unemployment Rate (%)
4.0
5000
2.0
0 0.0
1968
1974
1980
1986
1992
1970
1972
1976
1978
1982
1984
1988
1990
1994
1996
1998
2000
2002
2004
2006
2008
2010

13. Job Creation in the U.S.
 U.S. firms would rather operate domestically.
 It is costly to operate abroad.
 Government regulations, transportation
costs, communication, political uncertainty, and
negative publicity.
 In order to increase domestic manufacturing
employment the U.S. would need:
 Greater worker productivity.
 Increased on-the-job training programs.
 More vocation training programs at the K-12 level.
 Reduce labor costs (unions).
 In 2005, GM paid an average wage of $75/hour in unionized
US firms.
 Toyota paid an average wage of $48/hour in non-unionized
US firms.

14. Manufacturing
Manufacturing Production in US and China, 1970-2009
2,000.00
1,800.00
1,600.00
1,400.00
Billions of $
1,200.00
1,000.00
China
800.00 United States
600.00
400.00
200.00
0.00
1978
1992
1970
1972
1974
1976
1980
1982
1984
1986
1988
1990
1994
1996
1998
2000
2002
2004
2006
2008
2010

15. Job Creation in the U.S.
 Manufacturing jobs in China are unlikely to return
to the U.S.
 China has an abundance of (low-skilled) labor and
specializes in labor-intensive goods:
 Chinese exports to the U.S. include: electrical machinery;
apparel; toy, games, and sporting equipment; furniture;
footwear; plastics; leather and travel goods.
 The U.S. tends to specialize in more capital-
intensive manufacturing.
 U.S. exports to China include: heavy machinery; power-
generating equipment; aircraft; medical equipment; and
vehicles.

16. China’s Benefit to the U.S.
 In order to keep their exchange rate low, China
purchases U.S. debt.
 China is the largest international holder of U.S.
governmental debt.
 High demand for U.S. debt has allowed for record low
interest rates.
 Lowers prices for many U.S. consumer goods.
 Imports from China have saved U.S. consumers more
than $600 billion from 2000-2009.
 Job creation in trade sectors.
 Around the world, trade with China has created more
than 14 million jobs (only 590,000 in the U.S.).

17. U.S. Debt
 Total Debt = $15.3 trillion.
 $10.5 trillion in public holdings.
 $4.7 trillion in international holdings.
 $4.8 trillion in intra-governmental holdings.
 $2.7 trillion in the Social Security Trust Fund.
 $1.0 trillion in the Civil Service and Retirement and
Disabilities Fund.

18. International Holders of U.S.
Debt
Country Amount ($ billions)
China $1,100.7
Japan $1,042.4
United Kingdom $ 414.8
Oil Exporters $ 233.5
Brazil $ 206.9
Caribbean Banking Centers $ 174.8
 In a speech last year, Ben Bernanke stated that
he believes China is holding more than $2 trillion
in U.S. debt.

19. Should we be worried?
 Yes, here is why:
 Foreign money is not a stable source of funding.
Foreign investors tend to seek out highest return
and have little obligation to keep money in a
particular country.
 Members of China’s government have stated their
intention to slowly reduce their holdings of U.S.
debt.
 Public holding of U.S. debt is expected to increase
by another $5 trillion by 2020.

20. Are we as bad as Greece?
 No, in terms of fiscal stability, we care about
public holdings of debt (in terms of GDP):
Country Public Debt (% of Debt held Abroad (% of
GDP) GDP)
United 68.9% 30%
States
Japan 200.5% 15%
Greece 135.2% 90%
Italy 120.0% 50%
France 87.4% 50%

21. In the Future
 In the short run:
 China needs the U.S. to continue buying their stuff.
 The U.S. needs China to continue buying our debt.
 In the long run:
 China will shift into a more consumer-focused
economy.
 The U.S. will need to shift into a fiscally responsible
country.
 In the mean time:
 China will keep threatening to stop buying U.S.

22. China and Washington State
 In 2010, Washington State exported $10.2 billion
of goods to China.
 2nd among all states (behind California $12.5
billion).
 This amounts to approximately $2,000 per
resident.
 China is Washington State’s largest export
market.

23. China and Washington State
Washington Exports to China ($ millions)
10300
9113
8310
7311
5282
4288
3923
3269
2929 2784
1901
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

24. China and Washington State
Washington’s Top Export Markets, 2010
1. China $10.3 billion
2. Canada $6.9 billion
3. Japan $6.1 billion
4. South Korea $2.7 billion
5. Indonesia $2.0 billion
Washington’s Top Exports to China, 2010
1. Crop Production $4.0 billion
2. Transportation Equipment $3.9 billion
3. Waste & Scrap $378 million
4. Computers& Electronics $362 million
5. Forestry Products $297 million