Tuesday, August 4, 2009

Don’t Learn Chinese Just Yet

You’ve heard the headlines. China will become the world’s biggest economy any minute. America will slowly slip away. We don’t manufacture anything. We’ve become second rate. Put a chopstick in us, we’re done. But is this true? No, it’s not. . .

Not a week goes by without some hand-wringing journalist telling us that any minute the Chinese economy will surpass the American economy. Last month, we learned that China’s auto market will be larger than the American market this year. This month, Fortune magazine released its annual list of the world’s top 500 global companies, and, surprise, “the number of US companies . . . fell to its lowest level ever.” Even the top slot went to a non-American company for the first time in over a decade. At the same time, “more Chinese firms appeared [on the list] than ever before”!!

That sounds bad, right? It’s misleading.

China’s economy is big, sure. But ours is bigger. . . much bigger. The World Bank estimates China’s GDP at $7.8 trillion (2008). By comparison, the United States economy is $14.3 trillion dollars. Thus, China’s economy is only half the size of the American economy. (The European Union, if you want to count them, had a combined GDP of $16.5 trillion).

Alarmists originally estimated that China would overtake the United States in 2011. But now they’ve moved their estimate back to 2035. But of course, that assumes that China will continue to experience its current astronomical growth rate, which didn’t happen with any of the other countries that were going to unseat America. And there are reasons why strong growth can’t go on forever. China’s growth, like Japan’s and Korea’s before it, has been fueled by cheap labor (based on the bringing of peasants from the countryside into the manufacturing sector). But as economies grow, their labor gets more expensive and the economy becomes less competitive. Korea ended Japan’s run because it was cheaper. China ended Korea’s run. India is knocking on China’s door. Others wait as well.

So what about the Chinese market topping ours in car sales? Is this true? Sort of, but it’s not that clear. So far in 2009, Chinese consumers are buying cars at an annualized rate of around 10 million units. By comparison, Americans are buying only 9 million. But prior to the current recession, Americans bought around 16 million per year. If the American market returns to that level, the Chinese market will be only 60% of the size of the American market.

What about that Fortune list? Well, for starters, it wasn’t a Chinese company at the top -- it was Royal Dutch Shell. The Chinese only had one company in the top 10 (the state owned China Petroleum & Chemical Corp, which supplies 80% of China’s fuel) and only managed to get 37 companies on the list in total. That puts China below Japan (68), France (40) and Germany (39). The United States had 140.

And what about that claim that the United States doesn’t manufacture anything anymore? About 13% of the American economy, or around $1.8 trillion dollars, is directly related to manufacturing -- that’s about the size of Britain’s economy or France’s. Moreover, this number increases to 19% (or $2.7 trillion) when you consider indirectly related effort. That’s about the size of Germany’s economy, and would make our manufacturing sector alone the 6th largest economy in the world.

Further, we are the third largest exporter in the world, behind only Germany and China (in that order). That’s right, Germany exports more than China.

So what does this mean? It means that reports of our demise as the world’s premier economic power are greatly exaggerated. So don’t bother learning Chinese just yet.


LawHawkSF said...

Andrew: I've already been through "OPEC is buying America," and "Japan is buying America," so I guess it's China's turn.

Writer X said...

As usual, the worst place to get accurate business news is to tune in to CNBC. Thanks, Andrew.

AndrewPrice said...

Writer X, CNBC, like the rest, is about sensationalizing the news. They give you decent news, news you don't really hear on the other channels -- which have entirely given up on providing news and instead go for 100% opinion, wrapped in T&A. But sadly, they give you these little nuggest of news wrapped in ten tons of garbage.

Lawhawk, I recall those panics as well. The Arabs are coming the Arabs are coming! They were going to buy up everything and then take over the country. But then they went broke. So the Japanese came. The Japanese are coming, the Japanese are coming! Do you recall how every time they bought a building, the news would scream about "we're mortgaging America!" This is the same thing.

Next it will be India and then someone like Bangladesh.

Writer X said...

Yes, so true. I used to try and catch it in the mornings till their morning anchors started getting on my nerves. I just wanted to hear the top stories; instead, I got to listen to their opinions about the business news. It was quite annoying. Stopped that long ago.

AndrewPrice said...

Writer X, I stopped watching their morning show for the same reason. Of course, I stopped watching FOX for the same reason -- no news, just opinion presented as fact. Very frustrating. I'm particularly upset at FOX for blowing the chance they have to "fix" modern journalism.

Writer X said...

Yes, couldn't agree more. The Fox morning show is particularly annoying. It's liked some whacked out version of the Today Show. The banter got so irritating.

I used to like the Saturday morning business line-up on Fox but even that got bad; it was less about business news and more about people promoting their latest business book or people talking over each other to score a point.

AndrewPrice said...

That's what the news has become. It's a chance for people to promote their stuff as very ignorant anchors try to convince you that they're reel smarte by arguing with their guests. Yuck.

I miss the McNeil/Lehrer News Hour.

StanH said...

It’s just not fair we have all that Andrew, I feel bad …not! If Barry would get out of the way we’d take off, as has been stated so many times now, I think it’s purposeful. Drive us down and we’ll run to the nanny state, and who will be there to greet us our new Messiah, Barry! The Chinese have their own problems as well, I hear of riots with the peasants, and to put perspective to that, what are we talking about, 700 million people pissed off peasants with pitch forks. Also, the comparison of the two countries is apples and oranges there are 300 Million plus Americans, and a billion plus Chinese.

CrisD said...

Yeah, you should read the posters over at Pat Buchanan at Human Events.
Stopped reading that drivel about China owning us, Israel forcing us into wars since WW2, the sky is falling...blah blah blah.

I'd rather hear cogent leadership on the right any day of the week. Thanks for this post.

AndrewPrice said...

CrisD, You're welcome. I agree, I can't stand the sky-is-falling stuff either. There are enough things to worry about without adding fake problems. And how does it help us to become irrational about the issues we face?

Stan, You're right, the Chinese face some very serious problems. Not only are parts of China basically occupied countries, but the Chinese government has made a dirty-deal with its people, where they give up their freedoms for economic progress. When their growth starts to slip, no one knows what will happen. That's why they're concerned about keeping their growth rate above 8% annually.

DCAlleyKat said...

Andrew-> Next it will be India and then someone like Bangladesh.

Hey I still have my "Concert For Bangladesh" album...George Harrison, Leon Russel, and a great live cut of "Youngblood"...maybe it'll be worth something when they rule the world.

AndrewPrice said...

DCAlleyKat, keep the record, it might help you prove your loyalty to the new regime, when they finally take over. . . and the rest of us are working in the mines.

patti said...

i get all my news online....and you guys do a great job of straightening out the "facts" for all of us.

AndrewPrice said...

Thanks Patti, glad to help!

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