Why China Matters

China Expert
Ted Fishman is a veteran journalist and former commodities trader who has emerged as a leading expert on the People’s Republic of China and its development as a world power. He is noted for taking seemingly complex topics—particularly how global economic trends influence people’s everyday experiences—and making them understandable and meaningful for a general audience.

In his bestselling book, China, Inc.: How the Rise of the Next Superpower Challenges America and the World, Fishman describes the effects of China’s recent emergence as a world power on the lives and businesses of people across the globe.

State Legislatures asked Ted Fishman, author of China, Inc., why China matters to state lawmakers.

SL: What is the most important thing state legislators need to know about China?

Fishman: China is growing at a dynamic pace. Behind this huge burst of economic activity is a demographic shift that’s moving people from the country to the city. This is allowing businesses to grow and attracting the attention of the world’s investors. China is also doing an outstanding job of educating its best workers.

SL: China is growing at an incredible rate.

Fishman: Its growth has been around 11.5 percent a year for the last few years.

SL: Will it be able to sustain that growth?

Fishman: You can never predict whether a country can sustain things over the short run. China has a lot of threats to its immediate progress. But the free market genie is out of the bottle, and even if it does have a setback in the short run, that will probably make it stronger in the long run by booting out all kinds of inefficiencies. Just like the U.S. economy, which has grown 30-fold in the last 100 years, China can go a long way.

SL: What about all the changes the country is making in order to get ready for the 2008 Olympics? Is that too much too quickly?

Fishman: I don’t think China has gone too far too quickly, if you measure that against going backwards for 30 years under the worst excesses of Mao Tse-tung. But if you look at the era of market reform on its own, the last 10 years have happened very, very quickly.Most consequences have been environmental, but an economic one is the big gap between the rich and the poor that has come with accelerated economic growth.

SL: China is building coal-fired power plants at a rate of one a week. That’s been good for West Virginia, which benefits from selling mining supplies to the Chinese. Do other states benefit from China’s economic boom?

Fishman: Any state can prosper if it has something to sell China that China can’t produce on its own, or can make things better than China can. China’s big export boom is the result of the change of rules that came with China’s ascension to World Trade Organization. But so far, it has a long way to go in terms of compliance on the import side. If it complies more, then Americans will have lots to sell to China. Some states do very well, especially those that have advanced technology. Minnesota exports advanced medical technology to China. In fact, American businesses are now exporting around 50 billion dollars worth of stuff to China.

SL: There’s much concern about the pollution China is adding to the environment. Will its leaders be able to turn this around?

Fishman: The harm to the environment is the most troubling result of China’s development. I have very little hope of regulation or technology keeping pace with China’s development. With the country’s economy doubling every five years, even if China successfully regulated emissions and cut them in half, it will still have the very same pollution five years from now. It is a difficult problem.

SL: Some of China’s economic growth has come at the expense of man. What repercussions does that have?

Fishman: For the whole world, the environmental repercussions are big. Chinese pollution arrives on the shores of not only Asian countries, but on our western shores, too. Anything that affects China in a major way, now affects the world in a major way. It has one fifth of the world’s population and its imprint on everything from the job picture to the environment will be significant in very much the same way that the emergence of the United States affected the whole world in fundamental ways over the last 100 years. China will be offering a similar story over the next 100 years.

SL: Do you think China will be able to move toward a better paying workforce?

Fishman: China will continue to have high-cost labor and low-cost labor at the same time. It has the scale to accommodate just about any kind of business, whether it is high-value service or low-value manufacturing employment. Even the bottom has some wage inflation, around 7 percent a year. So workers who were making 53 cents two years ago are now making around 65 cents an hour. And China is also making very, very sophisticated products. It is sending rockets into space. It is making digital cameras that are among the most sophisticated, and flat panel TVs, and solar panels. It is a complete economy from the very low road to the very high road.

SL: You talked about the World Trade Organization. Will that have any impact on China and its disregard for trademarks?

Fishman: So far, a lax policy on intellectual properties has been very much in China’s interest. The future will depend on when China starts producing enough intellectual property on its own for its government to believe it needs protection internationally. Then China will have to be a good citizen. But so far, China has benefited enormously from not playing by world norms. And we shouldn’t be too self-satisfied on intellectual property either, because American businesses that import stuff from China all benefit from China’s lax regard. Part of what drives down prices in China is that its shop floors are filled with copies of expensive machines patented in other countries. And we buy the stuff that comes out of those factories.

SL: Can any company, so to speak, China-proof itself?

Fishman: Yes. So far, China’s advantage has been mostly a labor advantage. If you focus on products whose labor component is small, then you can compete. If you have the most modern, automated, sophisticated plant that delivers goods at the highest quality at the fastest time, you can compete.

SL: What are the pros and cons of keeping the Chinese yuan adjusted to the U.S. dollar?

Fishman: They depend on whether you are a consumer or producer. For American consumers, keeping the yuan tied to the dollar has been a good deal. It provides us with some price stability and even downward pressure because costs tend to go down in China, until recently at least. The world is reluctant to pressure China to get a more flexible currency because of China’s footprint right now. It would be very, very inflationary.

But for producers around the world, the currency story is different. If China’s currency is too cheap, it hurts the competitive status of all other producers. China’s policy of tying its currency to the dollar has helped push the European currencies up because of the way currencies are traded. And that has made the Europeans very nervous. Germany is the world’s largest export economy and its currency is worth 40 percent more than it recently was.

SL:  How does China’s rise affect the average American?

Fishman: It affects us most immediately in our cost of living. This year it probably saved the average American somewhere around $650. It affects the employment picture, especially manufacturing, in two ways. Some businesses will move their manufacturing to China. Some will automate in order to compete with China. Both of those add up to job losses.

SL: What about the United States exporting brain-power to China, or will we be importing expertise from China?

Fishman: Expertise in a global market goes in both directions. Our best hope for the economy is to be the very top of the feeding chain on technical expertise and also on softer kinds of expertise, such as marketing and communications and entertainment. But our best hope is to have knowledgeable workers that the rest of the world can’t compete against. And in order to do that, we have to invest in the technology which creates the need for knowledgeable workers that no one else has. And we have to invest in the education system that creates those workers. The Chinese have a definite strategy on creating the world’s best workforce. We need a better strategy than they have.

SL: So it seems as if China is nipping at our heels.

Fishman: Yes. The South Korean government keeps asking this interesting question. How long will it take for the Chinese industrial complex to have technological parity with Korea? The gap keeps shrinking. Now they think in a year and a half China will be equal to Korea. And in a short time after that to Japan. And in a short time after that to the United States. Unless we do something to widen the gap, it will just happen.

China Facts

• China has the longest continuous civilization and is the world’s most populous country with about 1.3 billion people—20 percent of the Earth’s population.
• China has between 100 and 160 cities with 1 million or more people. The United States has only nine cities that size.
• China’s economy grew at an average rate of 10 percent per year from 1990 to 2004, the highest growth rate in the world. Its economic output is $1.98 trillion, pushing China ahead of Italy as the world’s fourth largest economy. 
• China joined the World Trade Organization in 2001. WTO commitments include allowing more foreign investment in telecommunications, energy, banking and insurance.
• In 2002, China overtook the United States as the world’s largest recipient of foreign direct investment (FDI). In 2005, China received $60 billion in FDI and the United States was one of the largest sources, investing $3.1 billion.
• China runs a trade surplus with the world’s three major economic centers. The U.S. bilateral deficit in 2005 ($201 billion) was 1.6 times larger than that of the EU-15 ($121.8 billion; the EU-25 deficit was $133 billion) and seven times that of Japan ($28.5 billion).
• In 2005, the United States exported $41.8 billion in goods to China, growing 157 percent since 2000. During that five years, exports to China grew more than five times as fast as exports to the rest of the world, making China the USA’s No. 4 export market, behind only Mexico, Canada and Japan.
• Over two-thirds of China’s exports are “low-end manufactures”—appliances, toys, furniture, footwear, apparel and plastic goods—while 85 percent of its imports are capital-intensive machinery and equipment, electronic goods, and natural resource related products.
• Sales from foreign companies operating in China account for more than half of China’s exports.
• China is now the world’s largest maker of consumer electronics. Chinese manufacturers make 60-percent of the DVD players sold worldwide. 
• China is pouring $600 million a year into biotech research. Though small compared to 1999 when between $1 billion and $2 billion was spent in the United States, projections suggest the Chinese may inch closer to U.S. research spending in the coming decade.
• The Chinese communist government has controlled China since 1949 and retains an iron grip on politics. But today, only a third of China’s economy is directly state controlled.

Sources: The Economist, Time, Newsweek, Congressional Research Service, National Geographic, ChinaDaily.com and China, Inc.

CHECK OUT our online podcast with Jeremy Meadows, NCSL’s foreign policy expert, talking about U.S. trade with China and the role China plays in the global economy. Find the link at www.ncsl.org/magazine.