What Every Investor Should Know About U.S.-China Relations
Everyone plays up the notion that we are in huge amounts of debt. This is simply not true.
With Treasury Secretary Henry Paulson in China this week to discuss a range of issues related to U.S.-Sino commerce, we thought it would be an opportune time to separate fact from fiction and highlight some key issues that presently define the economic ties between the United States and China:
1. U.S. Foreign Investment in China — Not As Much as You Think Rarely does a day pass without the media reporting yet another American firm de-camping the United States for China. Reality is quite different. U.S. foreign direct investment (FDI) to China has climbed over the past decade, but a little perspective is in order. The $15.5 billion the U.S. has sunk in China this decade equates to only 1.6% of the global total. U.S. FDI in Ireland and Germany was roughly triple the level of investment in China over the same period.
2. The U.S. Enjoys a Huge Lead over China in FDI It is no secret that Chinese investors are quite interested in increasing their direct investment position in corporate America. Equally, it’s no secret that any planned purchase of a U.S. company by Chinese investors is subject to a great deal of scrutiny in Washington. Next to America’s massive trade deficit with the mainland, China’s foreign investment in the U.S. has emerged as a key tension point between the two parties. That said, it’s interesting to note that when it comes to foreign direct investment — or the corporate presence of the U.S. in China versus China’s presence in the U.S. — the U.S. enjoys an overwhelming advantage over the mainland. In 2006, for instance, U.S. foreign investment in China on a historic cost basis totaled $22.2 billion, a figure well in excess of China’s investment stakes in the U.S. In other words, U.S. firms have far better access to the Chinese market than their Chinese counterparts in the United States. This investment gap represents a strategic competitive advantage to corporate America.
3. What really attracts U.S. firms to China? Consumers Contrary to popular opinion, access to the Chinese consumer remains the key motivation of U.S. firms entering China. Keep in mind that China is not a unified market of 1.2 billion people but a collection of markets with different dialects, varying levels of development, and disparate per capita incomes. These variables, along with many others (the brand-sensitivity of Chinese consumers coupled with intense foreign and local competition) dictate that American firms adapt to local tastes and operate on the ground. Customer proximity, in other words, is key in China.
4. “Made in China” — What It Really Means The mainland has emerged as an exporting powerhouse, with “Made in China” the most ubiquitous signature in the world. Yet lost on many folks is this: A great deal of what China exports to the United States and the world are goods from so-called foreign-invested enterprises, or foreign subsidiaries of various global multinationals. “Made in China” is not what most people think. Thousands of low-cost Chinese firms are not flooding the U.S. market with goods, displacing U.S. workers in the process. Rather, foreign firms are increasingly leveraging low-cost China to their competitive advantage.
5. The U.S. Trade Deficit with China: A Dangerous Scorecard Much has been made of China’s merchandise trade surplus with the United States, which topped $230 billion in 2006. That’s a large figure, to be sure, although the figure does not accurately reflect the true nature of bilateral commerce between the United States and China. Missing from this equation are local sales of goods and services of U.S. foreign affiliates operating in China. The latter totaled some $86.5 billion in 2005 (the latest available data. Missing from the trade debate is the following: The primary means by which U.S. firms deliver goods and services to China is via foreign affiliate sales, not exports. At the end of the day, China does sell more to the United States, but not by the lopsided margin some might suppose.
6. Capital — China’s Top export to the U.S. China’s most important export to the United States is capital — or U.S. dollars to be more exact. Lost on many legislators in Washington that want to punish China for running such a large U.S. trade surplus is this simple yet critical fact: China not only provides U.S. consumers with cheap, high-quality goods, it also provides the capital to purchase such goods by recycling greenbacks earned from trade back into U.S. treasuries and other dollar-denominated assets.
7. The Mainland — An unlikely Source of U.S. Profits The lopsided nature of U.S.-China trade gives the impression that all the benefits go to the Chinese. That is simply not true. One of the best kept secrets on Wall Street is this: U.S. firms are making tidy sums of money in the Middle Kingdom.
Data on foreign affiliate income from the government’s Bureau of Economic Analysis corroborate these findings, with U.S. foreign affiliate income in China rising from $1.2 billion in 2000 to $4.7 billion last year. The bottom line: At a time when the U.S. is threatening to impose greater trade sanctions against China, U.S. firms with operations in China are posting record profits.
Here’s the rest of the list.
