The Reality About Trade With China: Few Riches for U.S. Businesses
One of the grand illusions surrounding the China trade debate is that American business is about to make a bundle in China.
Not soon it won’t, even though conditions are likely to improve with the probable passage this week in Congress of permanent normal trade relations and China’s entry into the World Trade Organization this fall.
Both moves on trade are necessary for many big reasons, including stability and development in Asia and competitive opportunities for U.S. business and agriculture.
But the first step is not the journey. Such business as there is will develop slowly. Resistance from farmers and other interest groups within China will gum up negotiations over WTO compliance to begin with.
Also, there isn’t that much business to do. U.S. farmers export $1.1 billion worth of foodstuffs to China today. By 2005 that total will increase to $3 billion, according to U.S. government forecasts--a decent rise, but not extraordinary.
Movie industry predictions that billions will flow to U.S. entertainment companies are ludicrous. China takes 10 U.S. films a year now and will allow 20 after it joins WTO. Gross film revenues may rise from today’s $18 million a year to $36 million. You couldn’t produce a Hollywood movie for $36 million these days.
The foolish way to look at China is to use simple arithmetic: “There are 1.2 billion people in China. If I can get a dollar from each, I’ll be rich.” Nobody has ever got that “dollar,” including New England mill owners in the 1890s who pushed for an “open door” trade policy in hopes of selling cotton to clothe China’s people. The New England mills ultimately closed and the U.S. to this day imports cotton garments from China.
But there is a powerful entrepreneurial reality to China’s economy, and smart businesspeople are looking to back it.
Redpoint Partners, a Silicon Valley venture capital firm, and Goldman Sachs, the investment bank, have invested $10 million in China ENet, an Internet company being formed by Chinese entrepreneurs who studied in China and the U.S. and see opportunity in their homeland. “We see the emergence of an entrepreneurial culture of people educated outside of China,” says Allen Beasley, a partner in Redpoint.
Entrepreneurs abound inside China. Very Special Chocolats, a manufacturer of fancy candies in Azusa, bought baskets and straw from China for its holiday gift baskets. Soon its basket supplier, James Chang, asked the firm to send him candies and jellies so he could sell gift items in China. As a result, Very Special Chocolats and the 24-year-old Chang have thriving businesses on both sides of the Pacific.
No accident that such business is small in scale. Many people assume that China’s economy is already big. But it isn’t. The annual output of goods and services--gross domestic product--of its 1.2 billion people is less than that of California’s 30 million people or Italy’s 56 million.
The difference lies in the vast sums of invested capital--the telecommunications systems, highways, schools, homes, commercial and social networks--that allow Californians and Italians to work more productively than the poor Chinese laborer or farmer, using tools as old as history.
And that’s just the point of China wanting to join the WTO. China wants investment from world capital markets. It needs to build up its infrastructure and to create 20 million jobs a year to keep pace with the growth of its urban work force. (About 400 million of China’s people are urban. The other 800 million or so live in what experts call “the countryside”--small towns and farm villages, which, however vibrant, are distant from the formal cash economy.)
Most foreign investment in China in recent years has come from overseas Chinese businesspeople, particularly from Taiwan, which operates factories and trains software engineers and other technology-savvy workers in China.
China’s entry to the WTO would be accompanied or followed by that of Taiwan and could spur productive relations between the two, predict Jonathan Pollack and Charles Wolf of Rand Corp., the Santa Monica research firm, in a paper just published in Asia.
U.S. business investment in China has been comparatively slight--$1.5 billion a year in recent years, according to a study by PaineWebber, the investment firm. That’s only 6% of U.S. companies’ investment in Mexico.
And investments in China haven’t been very profitable either, earning an average of 4% on capital, notes analyst Edward Kerschner of PaineWebber.
As China enters WTO, and if U.S. trade relations are extended, U.S. investment will increase. Motorola plans to invest $1.8 billion in a semiconductor fabrication plant. Qualcomm will participate in a joint venture with China Unicom to build a nationwide wireless phone network.
One development predicted in U.S. business circles is that China will become a parts supplier to world industry. “Look for our computer, aircraft and auto companies to manufacture part of their products in China, then send components elsewhere for assembly,” says Jeffrey Garten, dean of the Yale School of Management and a former investment banker in Hong Kong.
That vision may disturb many people. China thus would compete with Mexico, Malaysia, Thailand and other parts makers as well as routine parts production in the U.S.
American labor unions have been saying just that in their opposition to trade relations with China. They have a point, but it’s a shortsighted point because China won’t stop developing if the House of Representatives votes against permanent trade relations this week. It will wring concessions and investment from Europe and Japan. And if it is spurned by global capital markets, it will become a disturbing presence to its neighbors--South Korea, Japan, Taiwan.
So instead of looking for a bonanza or a boogeyman, why not look at the reality of China today? It is a complex society, undergoing historic change and conscious of a very long history. “The opposition of farmers, telecommunications ministries, local auto manufacturers and others to China joining WTO tells you there is ferment in that society,” says professor Richard Baum, a China scholar at UCLA.
Clearly, China integrating more closely with the global economy won’t be a picnic. But investment that creates jobs and spurs entrepreneurial energy will be healthier for Asia and the world. This week will probably see a first step toward that future--but the journey will still be long.
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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.
