CHINAFICATION

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CHINAFICATION A Global Economic Super Trend
Dr. Kay E. Strong, Associate Professor of
Economics
Huron County Development Council 12
January 2007
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Globalization

• Economic perspective
• ?increasingly integrated markets
• Product, Labor Capital
• extensive in scope global
• intensive in impact domestic growing pains

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Driving global economic growth

• Emerging economies
• ? 43 share of world exports (2005)
• ?gt 50 of worlds energy consumption
• ? 4/5 of growth in oil demand
• ? 70 of worlds foreign exchange reserves
• In 5 years, IMF forecasts average 6.8 GDP
  growth

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Emerging Economies

• ? having huge impact on developed countries
  
• fundamental economic variable!
• GDP (output) mix
• employment rates wages
• Inflation rates
• Interest rates
• Profits
• Exchange rates

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US economy benefits

• Growth in global S D ? boost global output /
  incomes employment
• Globalization boost the US economy by 1 trillion
  annually
• (Institute for International Economics)
  
• Export jobs tied to export sales
• In Ohio, 6.6 of private sector workers in
  export-related jobs vs. WA, 9.3
• Gains come from less expensive clothing,
  electronics, cars, . more product choices

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8 Supertrends Shaping the Future of Business

• Over next 5-10 years the global marketplace
• will be altered by
• Consumer Supertrend Microsegmentation
• Competitor Supertrend Value Targeting
• Economic Supertrend Chinafication
• Technological Supertrend From Information to
  Knowledge
• Social Supertrend Dumb Dirty
• Political Supertrend CyberMobbing
• Legal Supertrend Knowledge Warfare (IPR)
• Geophysical Supertrend Counter-American

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CHINA a world partner in economic growth
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Chinafication

• ? growing consumer class will compete ever more
  intensely with First World consumers for needed
  resources oil, water, energy, grain,
  manufacturing raw materials, luxury food items
  (meat)
• worlds second largest oil consumer after US
• (7 b. vs. 21 b. barrels per day)
• 150 million unemployed Chinese will provide vast
  pool of cheap labor that dominates the worlds
  labor markets------
• near monopoly on low-cost manufactured goods
• ? Chinese manufacturers currently produce gt70
  of worlds toys, 60 of its bicycles, 1/3 of TV
  sets AC and ½ of the worlds microwave ovens

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• In 2004 China overtook US as the worlds leading
  exporter of
• high-tech IT goods (OECD)
• more intense competitive pressure from the
  China-Mart axis
• low-cost manufactured goods marketed to US
  retailing giant, Wal-Mart
• ? WTO status 2001 Chinas total imports
  exports accounts for 70 of its GDP
• accumulation of foreign exchange reserves for
  buying up foreign firms capital assets
• (excess liquidity creates low-cost pools of
  capital )
• Forecast By 2040 China will be worlds
  biggest economy!!

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Chinas Growth Model

• EXPORT driven

Chinas total annual Global exports
? 762 b. in 2005 from 151.1 b. 1996
(412) Chinese total annual Global imports
? 660 b. in 2005 from 138.8 b. 1996
(400) 102 billion trade surplus with
the world!
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Chinas Growth Model

• Creating jobs outside of Agriculture
• Creating disposable HH income savings
• Generating firm sales revenue profit
• Creating domestic investment opportunities
  (including foreign)
• ? Generating more economic growth

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Did YOU know

• Worlds No. 4 economy behind the US, Japan
  Germany
• (8.9 T. vs 12.4 T. US)
• Growth rate at average annual rate of 10
  since
• 1991 (3 to 4 US)
• Extraordinary buying power with the largest
  holding
• in the world of gt 1 trillion in foreign
  reserve earnings (export driven economy)
• (800 b. US)
• China saves almost 50 of its annual GDP
  (output)
• (-0.5 US)

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Did YOU know

• China is in the mood to buy build almost
  anything!
• ? Would you be willing to put your company
  up for sale to Chinese interests?
• Chinas US investments
• Auto parts maker in Rockford, IL
• IBMs laptop business purchased for 1.25 b. in
  04
• Iron Ore Mine, MN
• China is upgrading its infrastructure ? huge
  construction boom
• (45 of GDP for gross fixed investment vs. 17
  US)

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Did YOU know
Consumer Market 1.3 billion person with pended
up demand (300 m. US) (export-driven
soon to transition to consumer-driven
economy) Savings rate for households
16 China is the second largest investor in R
D gt Japan Heavy Investments in Education ?
engineers scientists (world source)
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Doing Business with China

• Implications for US
• GDP (output) mix
• Employment rates Wages
• Profits
• Inflation rates
• Interest rates
• Exchange Rates

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1. US GDP (output) mix

• US is No.2 import partner for China
• (2005 243.46 b.)
• China is No.4 export partner for US
• Mexico, Canada, Japan, China!
• (2005 41.8 b.)

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Merchandise Trade Balance (2005) TOTAL all US
Merchandise Export to China 41.83 b. TOTAL
all China Merchandise Import to US - 243.46 b.
US bilateral trade deficit with China -
201.62 B. of 12 T. of GDP output
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Trade with China a Problem?? SOLUTION
To rein in Chinas trade surpluses, rein in US
over-consumption under-savings (-0.5) habits!
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2. US Employment
Complaint Growing Chinese manufacturing base
? loss of jobs to lower wage Chinese competition
TRUTH! The world's labor-intensive
industries naturally migrate to locations where
abundant labor is available low wages are a
major factor in cutting production costs.
Goal of the Firm Profit (Sales Revenue
Cost of Production)
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• ? estimated 4 - 8 m. US jobs depend on
  US-Chinese trade!!
• Wal-MART (a US-based company the nations
• largest private
  employer)
• Chinas 7th largest Import market in the
  world!

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3. US Wages

• US Worker wage share of national income stagnant
  or falling.
• China 88 month local minimum wage for
  an 8 hour daily shift,
• 21 days/month
• Growing income disparity between top bottom US
  households
• top 20 households possess 50.2 of all US
  income vs.
  3.4 for bottom 20 households
• Poverty rates US 12.6 (37 m.) vs. China
  10

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4. US Profits

• It is true that Chinese products have penetrated
  the US market, but they are often made in
  factories owned by firms from the United States
  or other countries, as China is the world's major
  destination for foreign investment. Much of the
  profit goes into the pockets of foreign
  investors.
• Corporate Americas profit share of national
  income risen from 7 in 2001 to 13 in 2005.

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PROBLEM UNEVEN gains from globalization ?
high share of profits combined with low share of
wages in national income Solution
Governments role is to spread the benefits
of globalization more fairly without reducing the
size of gains through protectionist policies (via
tax benefit policy changes) Solution
AFL-CIO endorses investment in the next
generation of workers with a serious eye to the
future! Speed up the shift of jobs, improve
education training to prepare workers for
tomorrows jobs enhance flexibility and openness
of labor and product markets to respond
President BUSH advises affected workers to
take courses at local community colleges (Aug.
06)!
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5. US Inflation Rates

• Trade gains come from less expensive clothing,
  electronics, cars, .
• Excess US consumer demand is channeled to import
  market rather than creating domestic price
  pressure
• THANK the Chinese for low Inflation rates!
  (2.0 Nov-Nov 06)

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6. US Interest Rates

• Foreigners now hold 52 US National Debt 8.8 T.
  
• (a by-product of continuous federal budget
  deficits/ overspending habit)

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• Clyde Prestowitz, president of the Economic
  Strategy Institute
• The USA requires about 3 billion in foreign
  capital every working day to finance the huge
  gap between its consumption of foreign goods and
  its exports. ..People don't realize this, but
  our economy is on life support from foreign
  lenders and investors."

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• Chinas extraordinary buying power with the
  largest holding in the world of gt 1 trillion in
  foreign reserve earnings
• China holds 344 b. of US National debt
• 2nd behind Japan at 641.1 b. (Oct 06)
• THANK the Chinese for low Interest rates!
• Promotes domestic investment spending economic
  growth employment!

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7. US Exchange Rates

• Chinese purchase of US Treasury securities
  (National Debt) maintain strength of US dollar in
  foreign market.
• Good News????
• Stronger US dollar finances the American
  consumption-driven lifestyle!
• BUT exacerbates chronic trade deficit!!

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Doing Business with China

• Protectionism Xenophobia
• mutually problematic!

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Four Futures for China Inc.

• (developed by Global Business Network, Business
  2.0 -8/06)
• Shifts in the balance of economic political
  power
• ?raise fundamental concerns about the US-Chinese
  future
• Forecast By 2040 China will be worlds
  biggest economy!!
• Forecast Chinese defense spending of 185
  billion by 2025--approximately 61 of what the
  Department of Defense spent in 2003. (RAND)

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Alternative FUTURES for China
Resolves Conflicts diplomatically
1
2
Low Economic Influence
High Economic Influence
3
4
Resolves Conflicts militarily
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Emperor of Business (1)

• High economic influence resolves conflicts
  diplomatically
• Overview
• China grows peacefully plays by the rules
  becoming a global business best friend piracy
  eliminated Mandarin language rises a second
  world language Chinas economy surpasses US by
  2041.
• Implications for Business
• Investment is a GO! Chinese middle class
  consumers spend more than ever.

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Emperors New Clothes (2)

• Low economic influence resolves conflicts
  diplomatically
• Overview
• Chinas growth rate is short-lived as it deals
  with environmental crisis, domestic unrest,
  poverty and governmental corruption.
• Implications for Business
• Long-term investment may sour if Communist Party
  cedes political and economic control.

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Emperor of Asia (3)

• Low economic influence resolves conflicts
  militarily
• Overview
• China grows slowly but only as fast as its
  neighbors as it shares in neo-regionalism stops
  playing by international rules causing
  outsourcing to move to Africa or South America.
• Implications for Business
• Realign with more stable partners, Canada or
  Latin America.

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Emperor of the World (4)

• High economic influence resolves conflict
  militarily
• Overview
• Chinas speedy growth tips all the scales in its
  favor dictates the rules, stops buying US
  Treasuries US interest rates rise yuan becomes
  global currency realigns with Russia and India
  politically.
• Implications for Business
• Multinationals align with Beijing hostilities
  rise between US and China.

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REMINDER

• Globalization is a powerful force for determining
  the Future.
• The BEST of all futures is possible through an
  active exploration of possibilities!

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Do Business in China

• 89 of all US firms exporting to China were small
  and medium-size enterprises in 2003.
• China is in the mood to buy almost anything!
• China is in the mood to build almost anything
  infrastructure related construction boom.
• China is short on business management skill MBA
  
• Tourism potential if you have Approved
  Destination Status (ADS)
• out of China's 30 million outbound tourists in
  2005, the US is only seventh choice as a
  destination for Chinese tourists.

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Contacts

• US Office of Travel and Tourism Industries (OTTI)
  
• www.tinet.ita.doc.gov/
• U.S. Commercial Service (Department of Commerce)
• China Business Information Center
• export.gov/china
• 800-USA-TRADE

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Some READINGS
Futuring The Exploration of the Future by Edward
Cornish
Future, Inc by Eric Garland
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• Comments?

kstrong_at_bgsu.edu
Dr. Kay E. Strong, Associate Professor of
Economics
BGSU Firelands One University Drive
Huron, Ohio 44839
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• Thank You!

Dr. Kay E. Strong, Associate Professor of
Economics
BGSU Firelands One University Drive
Huron, Ohio 44839