With US or Without: Chinese Imports

by Beau Rowland

In the international furor surrounding the 2008 Olympics in China, I find myself in the rare position of agreeing with Bush’s steady line of support for Beijing. The reasons, I think, are in part economic. Here’s how I see it:

In a recent article in The Economist, the debate over what is driving China’s economic growth seems to be coming to a close: while some economists maintain that China’s astronomic growth rate in the last decade is mainly attributable to exports, The Economist makes a strong case to the contrary: That growth has never been led by the export economy and is primarily driven by increasing domestic demand consisting of investment and especially consumption (particularly as of late).

Between 2005 and 2007 exports only contributed 2 to 3 percentage points to GDP, whereas domestic demand contributed 8 or 9. And, even with slowing exports to America, increase in domestic demand buttressed GDP—thus the percentage drop in annual GDP for 2007 due to decreasing American imports was only slight. Surprisingly, one Beijing-based firm expects that net exports will drop to zero in 2008 while imports are surging (up by 8%), which serves to significantly undermine the preconception that growth is driven by exports.

So, why support the Olympics, despite the propitious occasion to cite China’s domestic human rights abuses and foreign policies? The main reason, as I see it, is that we want to continue to be one of China’s main trading partners. As China diversifies its portfolio of countries which it can turn to for various resources, goods, and services, it becomes more preferential in its trade agreements, potentially opting away from the US for products it could procure elsewhere and at a cheaper price. Additionally, as China becomes richer, the kinds of products that will comprise its imports will be those of higher value—essentially, the ones America and Western Europe are most capable of supplying.

In terms of the exchange rate, about a week ago the yuan dropped below 7 for the first time. Loosening of the exchange rate makes imports cheaper and exports more expensive, allowing for increased US exports to China. This is also good news for the US, as growth of China’s trade surplus slowed significantly over 2007.

The political dimension completely aside, to compromise this trade relationship seems potentially quite costly. If China is trending towards greater import demand, greater high-value products, and greater international leverage, to sour economic relations seems unwise.

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