As Trump fights with China over trade, U.S.-China economic relationship already being redefined



Chinese consumers, for the first time last year, bought more Cadillacs than Americans, which helped boost profits at General Motors. And although the designs of those Cadillacs may have been written in Detroit, almost all luxury cars were badembled in China by some of GM's nearly 60,000 local workers.

This growing dynamic of US companies that serve Chinese consumers with products made in China marks a change in global trade that could represent a major challenge for President Trump's "America First" agenda.

Trump has based his campaign to reform economic relations with China on the well-established notion that the country undercut US workers through the manufacture of low-wage products exported to the United States.

That campaign entered a new chapter this week when Trump once again raised tariffs on Chinese products after declaring dissatisfaction with the pace of negotiations on a new trade agreement.

But whether it succeeds in reaching a trade agreement, many economists and executives say, the nature of the US-China trade relationship is already being redefined.

After four decades of economic reform, China is transforming from a low-wage exporter to the largest consumer market for a growing number of industries, including automobiles, video games and computers.

"We are at the end of a period of globalization of production," said William Overholt, a senior fellow at the Asia Center at Harvard University. "We are at the beginning of a period of globalization of consumption in which the center of gravity moves from the baby boomers in the west to the relatively young Chinese."

[Small towns are dying everywhere but here]

A decade ago, for example, Chinese consumers bought 71 percent of products made in China, according to the McKinsey Global Institute. Today, Chinese people buy 85 percent of what they produce, and their economy is three times as large.

For next year, China's per capita income will have doubled since 2010, according to the Organization for Economic Cooperation and Development.

The phenomenon, which is also observed in other rapidly developing countries such as India and Indonesia, will create a new set of winners and losers.

In the United States, it is likely that the main beneficiaries of the era of globalized consumption are investors and highly skilled employees, rather than the workers who suffered when the companies moved abroad.

"It's definitely a profit story," said Dean Baker, senior economist at the Center for Economic Research and Policy. "It will have very little to do with any work here."

In the past, Americans bought the low-cost products made in China, which was a blessing for Chinese workers and also for Americans concerned about costs. But, in trying to serve the Chinese consumer, the opposite is not true. American companies, on the other hand, are establishing factories there and in other developing markets.

According to the Bureau of Economic Analysis, multinationals based in the United States have been creating jobs faster in China than at home. Since 2009, corporations have increased their Chinese workforce by 86 percent to 1.7 million, roughly four times the rate of increase in the home.

For Trump, that means a trade policy that often seems to promise a return to a previous era before globalization can disappoint, even if it gets a good deal with the Chinese.

Administration officials say they are making progress in balancing trade relations with China and other countries to correct the mistakes made by Trump's predecessors. A new trade agreement with North America, for example, requires more automobile manufacturing in the United States. (It must still be approved by Congress). The president's rates are credited with the reactivation of steel production, a factor in the addition of 452,000 new manufacturing jobs during his term.

Other trends could also benefit the United States. The increase in wages in countries such as China and the increase in automation make labor costs relatively less important in determining the location of new factories. That makes the United States more attractive as an investment destination, although the growing automation means that the new plants require fewer American workers than the factories that closed at the beginning of this century, vaporizing 6 million jobs.

In the trade talks with Beijing, the administration is also seeking greater access to the Chinese market, which could help the US export prospects. But the biggest new opportunities can do little for the workers who lost in the last 20 years from the growing trade ties between the United States and China.

US negotiators are pushing the Chinese to open their markets to industries such as financial services, insurance and cloud computing. These are profitable efforts, but those that favor the well educated and trained.

The president has often portrayed a global trade narrative that places the United States, not foreign markets, in the center. He calls it a "privilege" for other countries to sell in the United States market. And his decision to renounce a trade agreement of 12 Pacific nations, known as the Trans-Pacific Partnership, on his fourth day in office left US companies at a disadvantage in key Asian markets at a time when developing countries are driving the growth of global demand.

Now, many executives say they do not expect the United States to regain its role as the dominant market in the world.

Craig Allen, president of the Business Council of the United States and China, which represents companies such as Amazon, Goldman Sachs and Procter & Gamble, said the administration's position presents multinationals with a dilemma.

"A company told me today that they feel some tension between what their shareholders are saying and what the Trump administration is telling them," said Allen, a former US diplomat. "The administration is suggesting or emphasizing investment in the US. UU That's not where the market is; there is no market growth. "

Undoubtedly, despite the growing role of consumption in China's growth, the country remains one of the world's leading exporters and enjoys a significant surplus in merchandise trade. Brad Setser, a former White House economist in the Obama administration, said talking about a new era is premature.

"This is a possible future evolution of the global economy. It's not necessarily the trajectory we're already on, "he said.

The Chinese economy has also slowed from its double-digit growth rate at the beginning of this decade, and many business executives doubt President Xi Jinping's commitment to promoting market-oriented reforms. China faces a huge burden of corporate debt that some economists warn could cause a financial crisis and delay the start of a new economic era.

The typical Chinese individual also earns much less than an American. In terms of purchasing power parity, which takes into account the living costs of each country, China's per capita income is approximately $ 16,000, compared to approximately $ 60,000 in the United States.

However, China has firmly established itself as a great opportunity, if not the best, for a wide range of US companies, including Apple, Walmart and Caterpillar. In the last decade, per capita income in China grew 120 percent, compared to only 15 percent in the United States, according to Andy Rothman, investment strategist at Matthews Asia in San Francisco.

"This is the best consumer story in the world," said Rothman.

China's growing prosperity is part of a broader transformation of developing countries that is affecting the volume of goods marketed across borders, the design of industry supply chains and the mix of factory labor and robots.

By 2030, China's fast-growing developing countries, led by China, are expected to account for 51 percent of global consumption, nearly double their share in 2007, according to a study by the McKinsey Global Institute.

Companies in advanced economies, including the United States, the European Union and Japan, last year sold $ 4.5 trillion worth of goods, including machinery, chemicals and automobiles, to customers in poorer countries.

"This is exactly the wrong time to put barriers to trade," said Susan Lund, a McKinsey partner who led the study.

[Companies prepare for a world of permanent tariffs]

In recent years, China accounted for more than a third of global economic growth, roughly equal to the combined contributions of the United States, Europe and Japan, according to the International Monetary Fund.

For General Motors, which resulted in deliveries of 3.65 million vehicles last year to Chinese buyers, compared to less than 3 million to Americans. The automaker earned $ 2 billion last year from its joint ventures in China.

"We published the highest global sales mark in the 116 years of 382,184 units of Cadillac, mainly because of the strength of our performance in China," said Steve Carlisle, senior vice president of General Motors, at an investor conference last month.

The US multinationals UU Those who thrive abroad often add jobs at their headquarters, research laboratories and design studios. Successful companies such as Cadillac generate profits that reach the corporate results, generating innovations to create jobs for Americans.

But those gains are tilted towards investors and better educated workers.

"The benefit of Chinese consumers who buy more Cadillacs accumulates more for shareholders and highly qualified people. You will see more than one unbalanced distribution of benefits, "said Sergi Lanau, deputy chief economist at the Institute of International Finance.


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