Recognizing China As America's Growth Engine

Americans are fretting about a 9.5% jobless rate that isn’t budging, a half-trillion dollar trade deficit that isn’t narrowing and a million houses set to enter foreclosure. This may seem like a prescription for disaster, but as I see it, we’ve gotten ourselves exactly where we need to be to enter the next stage of our economic evolution.

For maybe two decades one of the biggest hurdles standing in the way of a more economically dynamic America was solecism and ignorance about the world at large. First and foremost was economic arrogance born of the goofy notion that the American consumer is the only economic growth driver worth catering to. Then there is the persisting idea that our commerce with the rest of the world is a losing proposition because we buy more manufactured goods from our trading partners than we sell to them. Equally misleading has been the related notion that we somehow lose by letting more people into our country.

Add up all three fallacies and you have the makings of the kind of frankenstein economy that badly needs to be taken down and rebuilt. That is precisely what is happening. Now, having suffered the consequences of overinvesting in housing for the American consumer, we’re ready to clear our heads and recognize the new realities that must drive us if we are not to be one of the shortest-lived great powers the world has ever known.

We have to start by recognizing the miscalculations underlying the three big fallacies that have led our economic policy down the rocky road to the collapse of 2008.

I’ve touched on the folly of seeing the American consumer as the driver of economic growth in an earlier piece. To see the absurdity of this mindset, we simply have to recognize that most Americans already enjoy the comforts of life: spacious homes, massive cars, more clothes and toys than we know what to do with, a clutter of furnishings, garages and closets full of electronics and sporting goods we rarely use. So the “American consumer” is about 340 million people with the desire to buy newer and better things but not really the need to do so. If we sense a downturn, we can tighten our belts and go for years without buying much.

On the other side of the Pacific is China, a nation of 1,340 million people of whom only about 120 million have roughly the level of material comfort we Americans generally enjoy. That leaves about 1,200 million Chinese who each need modern homes, furnishings, electronics, clothes, vacations, etc. And they are rapidly acquiring the economic wherewithal to afford these things as China’s living standard continues to advance at about five times the rate of the U.S., Japan and western Europe. If we multiply the number of Chinese moving into the middle class in the coming two decades by the extent of their material needs we can see that China’s consumers collectively have a bigger demand than American consumers by a factor of at least 20.

This brings us to the next great fallacy: the notion that trade isn’t fair unless we are able to supply more of these material needs directly. To recognize the fallacy of this view, imagine an American blue-collar family making $45,000 a year trying to outwork on the factory floor a central or western Chinese family making $$1,500 a year. It isn’t going to happen, and no American business executives will be persuaded that this is a smart strategy from an economic standpoint—which is why they keep outsourcing manufacturing to China and elsewhere no matter how much politicians may natter on about the trade deficit.

What matters isn’t the total absolute dollar volume of what is sold but how profitable it is. If we sell to the Chinese $100 billion less per year but earn as much or more profit, we should recognize that as a positive relationship. As things stand, we already sell the Chinese many things that are highly profitable for American businesses and workers: food, airplanes, sophisticated manufacturing equipment, software, movies, music, designer jeans.

More importantly, we earn many tens of billions a year by selling services that have even higher profit margins: travel, royalties on intellectual property, financial services, education, architecture, construction and advertising, among many others. Services are a much bigger sector of the U.S. economy than the manufacture of goods, accounting for about 82% of all jobs. Since 1970 U.S. exports of services has grown at exactly twice the rate of export of goods. Today our annual exports of services to China totals about $100 billion, and accounts for about 38% of exports to China. While there are many low-paying service jobs for domestic consumption (e.g. flipping burgers, gardening), in export-oriented sectors service jobs pay much better than manufacturing jobs.

As 25 million Chinese move into the middle class each year, more U.S. services are needed to bring housing, food, transportation, entertainment and other amenities up to par with the rest of the developed world. Many of the construction-industry workers idled by the U.S. housing slowdown may soon be exporting their services to China where tens of millions of newly affluent consumers would appreciate American-quality housing. There will also be a need for American restaurant and hotel managers to meet the demand for American-style dining and travel facilities. Corporations and families wanting to compete globally will need to send more students to study in the U.S. and will hire more American teachers and consultants to come to China to provide the language and cultural training essential to international commerce.

One of the most corrosive and crippling misconceptions is the false belief that we lose by letting in immigrants seeking opportunities. Even leaving aside the billions brought each year by those coming under investment visas, all studies in the U.S. and Canada reviewed by a Cato Institute paper found that immigrant families—legal and illegal— collectively make a substantial net economic contribution. Within 3-5 years immigrant families outearned native families due to their more youthful compositions, according to a 1976 study. Consequently, they contribute more taxes than native families. In 1975 the average native family paid $3,008 a year in taxes while immigrant families paid $3,369 after 10 years, $3,564 during years 11-15 and $3,592 in years 16-25.

That doesn’t even take into account the revitalizing effect on the economy of ambitious, driven immigrants striving to build prosperous lives in the U.S.—the social bedrock of the American nation. Especially in this age of globalization, the linguistic and cultural skills that Chinese immigrants bring, for example, can help the U.S. compete in the key services that will make up half of U.S. exports to China within the coming decade. And homeowners depressed by the sinking values on their homes as foreclosures mount will appreciate the impact produced by immigrant families entering the housing market.

So if nothing else, the current hard times will help Americans rethink some outdated prejudices about what is good for our nation and pocketbooks, and shift our national focus toward profiting from the sustained global boom certain to result from a billion Chinese moving into the middle class the way Americans did in the years after World War II.