June 1, 2012 in Investing

How China’s economy influences the US

These days, even casual followers of financial news have noticed a rise in the volume of stories about China. There’s good reason for the coverage, says Robert Mittelstaedt, dean of Arizona State University’s W.P. Carey School of Business.

“China is the world’s second-largest economy next to our own. They are a huge trading partner, and our two economies are incredibly intertwined,” Mittelstaedt says.

On balance, we still import more from China than we export, according to U.S. government data, which shows a relatively unchanged trade deficit with China. But even as our appetite for imports continues, exports have grown by 50 percent since 2008, according to The Washington Post. Increasingly, exports will be an important part of the U.S. economy, especially given how vocal the Obama administration has been about its commitment to boosting American exports in the years to come.

Given those realities, it isn’t surprising that many in the U.S. often ask what the latest news out of China means for the U.S. economy. But individual stories, such as the recent news that China set a new, lower target growth rate of 7.5 percent, tend to obscure a larger, more important trend, Mittelstaedt says.

“The big impact on us is that China’s economy is maturing,” Mittelstaedt says. “I’m not sure they have any more ability than us to set their growth rate, but the idea that they’re looking at less growth shouldn’t be surprising.”

China in transition

What’s happening is that China is transitioning to a different kind of economy. “The story behind the story of a lower-than-expected growth rate is that China’s economy is in a broader economic transformation,” says Michael Stanat, a marketing manager with SIS International Research who splits his time between Shanghai and New York.

According to Mittelstaedt, the shift means China may be losing its place as the world’s go-to supplier of cheap labor as it transitions away from manufacturing and exports.

But Stanat points out that it also means the Chinese middle class is growing and with it, China’s economy is likely to be driven more by domestic consumption. It’s a complex trend that impacts the U.S. economy in several ways.

While some pundits fret over a rising China, Keith Fitz-Gerald, the chief investment strategist for Money Morning, a Baltimore-based investment newsletter, takes the opposite view.

“A powerful China is coming, and we have two choices. Either we’re at the table, or we’re on the menu,” says Fitz-Gerald, who adds that China isn’t the enemy. “Good news from China is good news for the U.S.; bad news from the Chinese economy is bad news here.”

According to Fitz-Gerald, the rise of China presents a dramatic opportunity for the U.S., especially if it can shift to an export-driven economy.

“Over the next decade, the world is going to have billions more people entering the middle class,” Fitz-Gerald says. “The smart companies are already starting to cater to that market.”

Mittelstaedt says companies such as McDonalds, Starbucks and Ford have been betting on a Chinese middle class they believe will be large and keen to spend its disposable income. Recently, The Gap announced plans to open 30 stores in China this year, no doubt eager to sell American fashions to a growing Chinese middle class.

But the success of American brands isn’t a foregone conclusion. Americans who profit from the rise of China’s middle class will be those who can see the world from a global perspective, says Fitz-Gerald.

“We’re asking people to understand that a big change thousands of miles away is just as important as what’s happening in their neighborhood,” Fitz-Gerald says.

Investing in China

For investors, a global, interlinked economy can be a tricky thing to gauge because it’s relatively new and incredibly complex.

On the one hand, Mittelstaedt says the high growth rates China experienced in the last 10 years are more likely to be replicated by poorer countries that are further down the development curve because those nations simply have more ground to close with the rest of the world’s developed economies. The message: If you’re looking for high-growth countries, you probably shouldn’t look to China anymore.

But as Fitz-Gerald points out, it’s hard to think of investments as being country-specific anymore.

“Even if you just invested in the (Standard & Poor’s 500 index), you’d have a lot of exposure to China because a lot of those companies make more and more of their money in China,” Fitz-Gerald says.

US jobs and China

But if the future of investing is going to grow more complex as China, the U.S. and the rest of the world’s economies become more integrated, the future of work is also going to require a global outlook, one defined by uncertainty, at the moment.

“There’s a lot of talk about when manufacturing jobs will come back to the U.S.,” Fitz-Gerald says. “But the truth is that even without the last few years of crisis, the trend of globalization has meant that those jobs have been leaving the U.S. for more than a decade.”

Tracking jobs lost to China isn’t without difficulty or controversy. However, the Economic Policy Institute, a nonprofit, nonpartisan think tank in Washington, D.C., calculated that between 2001 and 2008, the U.S. lost 2.4 million jobs as a result of increased trade with China.

But jobs lost to China aren’t just about trade. The ongoing digital revolution also has changed the nature of work in the U.S., according to Fitz-Gerald, who points out that many of the jobs employers are looking to fill today didn’t exist several years ago. But Fitz-Gerald says Americans who can adapt and learn new skills that are necessary for technology-intensive industries will be able to compete.

Right now, Fitz-Gerald points out, technology that allows mom-and-pop businesses to sell around the world are coming online, potentially opening doors in China for America’s Main Street businesses.

“It’s really a question of innovation,” Fitz-Gerald says. “These are scary times, but there’s a lot of opportunity for those who can innovate because countries like China represent big, growing markets.”

But for those who can’t or won’t accept a new paradigm in which countries such as China share economic power with the U.S., Fitz-Gerald offers a lesson from history.

“Two hundred years ago, the U.S. was known for its cheap labor and European nations were the economic powerhouses that drove the world,” he says. “Right now, we’re at a crossroads, and we can either accept that the world is changing and adapt, or we can put our heads in the sand.”

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